_ 

Dr.  P  £". 


GIFT  OF 


1 


The 

Canadian  Banking  System 
1817-1890 


OF   THE 


AMERICAN  ECONOMIC  ASSOCIATION 


VOL.  X.  Nos.  1, 2  &  3.  -I  \     |£CN™ 


PRICK  $4.00  A  YEA 


THECANADIAN 
BANKING  SYSTEM 

1817-1890 


BY 

ROELIFF  MORTON  BRECKENRIDGE,  Ph.  D. 

Sometime  Seligman  Fellow  in  Economics, 
Columbia  College 


January,  March  and  May,  1895 


PUBLISHED  FOR  THE 

AMERICAN  ECONOMIC  ASSOCIATION 

BY  MACMILLAN  &  COMPANY 

NEW    YORK 


LONDON:    SWAN  SONNENSCHEIN  &  CO. 


^4 


strut 


COPYRIGHT,  1895,  BY  AMERICAN  ECONOMIC  ASSOCIATION. 


BALTIMORE: 

>JV 
FROM  THE  PRESS  OF  GUGGENHEIMER,  WEIL  &  Co. 

JX? 


7HI7ERSITF 


PREFACE 


If  any  were  required,  a  reason — perhaps  a  suffi 
cient  reason — for  the  present  investigation  might  be 
offered  in  the  circumstance  that  an  essay  to  present 
in  a  systematic  and  fairly  thorough  manner  the  facts 
with  which  I  have  attempted  to  deal,  has  never  yet 
appeared  in  print.  The  growth  and  improvement  of 
the  banking  system  are  parts  of  the  commercial  and 
legislative  history  of  Canada  even  less  cultivated 
than  the  broader  field  of  its  economic  history.  Yet 
the  course  of  the  development  ought  by  no  means 
to  be  devoid  of  interest;  the  results  in  some  respects 
are  unique;  and  where  it  is  now  carried  on  the  Cana 
dian  system  of  banking  is  believed  to  be  productive 
of  the  highest  possible  advantages. 

A  second  reason  could  well  be  found  in  relation 
with  the  banking  situation  of  the  United  States. 
Observers  in  all  quarters  have  noticed  the  growing 
necessity  for  reform  in  the  currency  and  banking 
system  of  this  country,  and  have  remarked  the 
demonstration  of  the  necessity  in  the  frightful  crisis 
precipitated  by  distrust  in  the  value  of  the  currency 
commonly  used.  They  have  noticed  also,  especially 
among  those  who  are  most  deeply  interested  in  the 
organization  of  credit,  the  growing  conviction  of  this 
necessity — a  conviction  of  which  the  last  and  most 
significant  expressions  are  the  resolutions  adopted 
on  the  llth  October,  1894,  by  the  American  Bankers' 


6  Preface 

Association,  in  convention  assembled  at  Baltimore. 
It  is  possible,  at  least,  that  from  some  account  of  the 
Canadian  banking  system  an  American  will  obtain 
instructive  contrasts,  as  well  in  history,  as  in  present 
organization  and  methods  of  operation,  to  the  system 
of  banking  and  bank  legislation  which  has  obtained 
in  the  United  States. 

Of  the  few  short  summaries  or  historical  sketches 
hitherto  published,  the  greater  number  are  unrelia 
ble,  even  in  respect  to  the  facts  which  are  included. 
The  principal  legal  text  on  banking  under  Dominion 
legislation  is  not  exempt  from  errors  where  the 
author  has  digressed  to  history,  while  certain  others, 
who  likewise  affected  the  cursory  style,  have  com 
mitted  still  more  mistakes.  Better  types,  or  worse, 
of  the  current  misstatements  than  are  in  the  historical 
survey  of  Canadian  banking  prepared  for  the  Statis 
tical  Year  Book  of  Canada  for  1893,  could  not  be 
found.  And  this  is  a  public  document  issued  by  the 
Department  of  Agriculture.  But  to  indulge  in 
polemic,  or  to  correct  such  carelessness  or  untruth 
specifically,  would  be  seriously  to  abbreviate  the 
treatment  of  truths  relating  to  the  system.  It  has 
been  necessary  to  restrict  this  essay,  as  far  as  possi 
ble,  to  exposition  alone. 

The  principal  sources  of  the  narrative  are  in  the 
public  documents  of  the  several  British  North  Amer 
ican  provinces  and  of  the  Dominion  of  Canada.  The 
statutes  passed  from  year  to  year  ought  to  be  named 
first,  and  then  the  legislative  or  parliamentary  docu 
ments  of  Upper  Canada,  Lower  Canada,  Canada, 
New  Brunswick,  Nova  Scotia,  and  the  Dominion  of 
Canada.  Since  the  confederation  of  the  provinces  in 
1867,  the  collected  debates  of  the  Parliament  of  Can- 


Preface  7 

ada — the  Hansard's  reports — have  been  of  service. 
Prior  to  that  time,  debates  were  reported  only  in  the 
newspapers  of  the  day.  It  has  been  necessary  to 
consult  the  files  of  various  journals  both  for  debates 
and  for  other  questions  arising  at  nearly  every  stage 
of  the  inquiry.  Memoirs,  biographies,  and  miscella 
neous  historical  works  have  also  been  examined. 

For  light  upon  matters  within  their  recollection 
and  for  information  as  to  the  practical  working  of 
the  Canadian  banking  system,  I  am  indebted  to  the 
courteous  and  generous  assistance  of  the  many  Cana 
dian  bankers  to  whom  my  queries  have  been  put. 
Without  their  help  the  task  of  research  would  have 
been  immeasurably  more  severe.  Especial  obligation 
must  be  acknowledged  to  Messrs.  Jas.  Stevenson,  B. 
E.  Walker,  George  Burn,  H.  S.  Steven  and  William 
Munro.  To  the  Honorable  George  E.  Foster,  D.C.L., 
Minister  of  Finance  and  Receiver  General;  to  J.  M. 
Courtney,  Esquire,  Deputy  Minister  of  Finance,  and 
to  members  of  the  permanent  staff  of  the  Finance 
Department ;  to  Messrs.  Martin  O.  Griffin,  F.  Blake 
Crofton  and  W.  T.  R.  Preston,  Librarians  of  the 
Library  of  Parliament  and  of  the  Legislative  Libra 
ries  of  Nova  Scotia  and  Ontario  respectively ;  and  to 
the  Editing  Committee  of  the  Journal  of  the  Cana 
dian  Bankers7  Association,  who  have  undertaken  the 
publication  of  the  essay  in  Canada,  are  also  due  the 
heartiest  acknowledgments  for  assistance  of  various 
kinds. 

R.  M.  B. 

OCTOBER,  1894. 


TABLE  OF  CONTENTS 


PAGE 

CHAPTER  I. — INTRODUCTION 13 

CHAPTER  II.— THE  EARLY  BANKS  IN  LOWER  CANADA 

§1.—  The  First  Banks 22 

§2.— The  First  Charters 27 

§3. — Characteristics  of  the  Early  Banking  System 33 

§4. — Environment  of  the  Banks 35 

§5. — Practice  of  the  Banks 37 

§6. — Further  Legislation 44 

CHAPTER  III. — UPPER  CANADA,  1817-1839 

§7. — Establishment  of  the  Bank  of  Upper  Canada 53 

§8.— The  "Pretended"  Bank  of  Upper  Canada  at  Kingston  58 

§9. — Economic  and  Political  Environment  of  the  Bank. . .  61 

§10.— A  Period  of  Expansion,  1830-1837 65 

§11. — Imperial  Regulation  of  Colonial  Bank  Charters 67 

§12.— The  Growth  and  Cure  of  the  Banking  Mania 73 

§13.— Practice  of  the  Banks 79 

§14. — The  Suspension  of  Specie  Payments  and  the  Crisis  of 

1837 87 

§15.— Effects  of  the  Crisis  and  Suspension 96 

§16.— Incidental  Details 106 

CHAPTER  IV. — PROVINCE  OF  CANADA,  1841-1850 

§17.— The  Bank  of  Issue  Proposed  by  Lord  Sydenham 109 

§18.— The  Legislation  of  1841  and  1843 113 

§19.— Bank  Returns  for  1841;  the  Bank  of  British  North 

America  and  La  Banque  du  Peuple 120 

20. — Correspondence  with  respect  to  the  Dollar  Note  Cir 
culation 122 

§21.— Imperial  Regulations  of  1846 124 

§22.— 1847-1850 128 

CHAPTER  V. — PROVINCE  OF  CANADA,  1850-1867. 

§23.— The  Free  Banking  Act  of  1850 133 

§24.— Amendments  and  Supplementary  Measures 14 

§25.— Faults  of  the  System 145 

§26.—  Statistical  View  of  the  Free  Banks..  .  148 


10  Table  of  Contents 

§27.— Repeal  of  the  Act  to  Establish  Freedom  of  Banking, 

and  Disappearance  of  Banks  organized  under  it. ...  150 

§28. — Continuation  and  Amendment  of  Bank  Charters 153 

§29.— 1857-1863 158 

§30.— Failure  of  the  Bank  of  Upper  Canada 165 

§31.— The  Provincial  Note  Act  of  1866 177 

§32.— Effects  of  the  Provincial  Note  Act 180 

NOTE. — Relation  of  the  Bank  Note  Issue  to  the  Prerogatives 

of  the  State 196 

CHAPTER  VI. — NEW  BRUNSWICK  AND  NOVA  SCOTIA 

§33.— The  Bank  Charters  of  New  Brunswick 200 

§34.— Nova  Scotia 205 

§35  — Relation  of  Bank  Legislation  in  the  Maritime  Prov 
inces  to  that  of  the  Dominion 211 

NOTE. — The  Treasury  Notes  of  the  Province  of  Nova  Scotia.  215 

CHAPTER  VII. — BANKING  REFORMS,  1867-1871 

§36. — Preliminary  Measures 219 

§37.— The  Question  of  Banking  Reform 222 

§38. — The  Case  against  Bank  Circulation  secured  by  Pledge 

of  Bonds 231 

§39.— Mr.  Rose's  Banking  Scheme 239 

§40.— The  Banking  Policy  of  Sir  Francis  Hincks 245 

§41.— The  "Act  respecting  Banks  and  Banking,"  1870 254 

§42.— The  "Act  relating  to  Banks  and  Banking,"  1871 258 

CHAPTER  VIII. — BANKING  UNDER  THE  CONFEDERATION,  1867-89 

§43.  —The  Expansion  between  1867  and  1873 264 

§44.— Depression,  1874-1879. 272 

§45.— Bank  Failures  and  Losses,  1874-1879 279 

§46.— The  Bank  Act  Revision  of  1880 288 

§47.— Dominion  Note  Legislation,  1872-1880 295 

§48.— 1880-1889 297 

§49.— Bank  Failures,  1883-1889 305 

CHAPTER  IX.— THE  REVISION  OP  1890 

§50. — Demands  for  Reform  and  their  Causes 315 

§51. — Discussion  Preceding  Parliamentary  Action 319 

§52.— Reforms  Adopted  by  Parliament 327 

§53. — Summary  and  Review 351 

CHAPTER  X. — ON  THE  PRESENT  WORKING  OF  THE  SYSTEM 

§54.— Characterization  of  the  System 360 

§55.— The  Principle  of  Large  Banks 365 

§56.— The  Principle  of  Branch  Banking .  375 

§57. — The  Canadian  System  of  Note  Issue 386 


Table  of  Contents  11 

§58  —Advantages  Incidental  to  the  Canadian  System  of  Issue  412 

§59.— Reserves 425 

§60. — Bank  Inspection  and  the  Depositor 435 

§61.— The  Shareholder  and  Borrower  of  the  Canadian  Bank  440 
§62.— The  Business  of  Canadian  Banks 452 

APPENDICES 

I.— Table  showing  the  Grand  Totals  of  the  Liabilities  and  Assets 
of  the  Chartered  Banks  of  the  Dominion  of  Canada  as 
reported  to  the  Government,  on  the  30th  June,  1867;  the 
31st  December,  1868-1893;  and  the  30th  June,  1894 459 

II. — Sundry  Items  of  the  Statements  of  Liabilities  and  Assets 
furnished  to  the  Department  of  Finance  for  the  last  jurid 
ical  days  of  the  months  ending  the  31st  December,  1890- 
1893,  and  the  30th  June,  1894,  by  Chartered  Banks  of  the 
Dominion  of  Canada  having  Paid-up  Capital  Stocks  of 
$500,000  or  over 463 

III.— Table  showing  Grand  Total  of  Notes  in  Circulation  at  the 

end  of  each  Calendar  Month,  January,  1879,  to  June,  1894  470 

IV. — Bibliography 471 


UNIVERSITY 


The  Canadian  Banking  System,  1817-1890 


CHAPTER  I 

INTRODUCTION 

THE  economic  character  of  banking  transactions 
varies  little,  wherever  they  may  be  concluded.  To 
perform  the  functions  of  discount,  deposit  and  note 
issue,  to  exchange  rights  to  demand  money  for 
money,  money  for  rights  to  demand  it,  and  rights 
to  demand  money  for  other  rights  to  demand  it— 
from  one  point  of  view,  that  is  the  whole  of  banking.' 
Banking  systems  differ,  not  so  much  in  the  character 
of  their  economic  services,  as  in  the  degree  of  per 
fection  with  which  those  services  are  performed,  the 
methods  of  accomplishing  them,  the  principles  on 
which  banks  are  organized,  the  powers  confirmed  to 
banks  by  statute,  and  the  obligations  and  restrictions 
imposed  upon  them — the  manner  and  completeness,  in 
short,  of  the  fulfilment  of  banking  functions.  Where, 
as  in  the  territory  which  forms  the  present  Dominion 
of  Canada,  banking  has  been  subject  to  special  en 
actments,  since  the  time,  practically,  of  its  first 
introduction,  it  is  possible  to  find  in  the  statutes,  or 
to  infer  from  them,  a  tolerably  accurate  idea  of  that 
complex  of  business  methods,  principles  of  organiza 
tion  and  legislative  regulations  which  make  up  a 
system  of  banking.  The  purpose,  therefore,  of  this 
investigation  will  be  to  trace  the  course  of  Canadian 


14  The  Canadian  Banking  System,  1817-1890 

banking  legislation  from  the  grant  of  the  first  bank 
charters  to  the  Bank  Act  of  1890. 

The  purpose  thus  stated  avoids  the  implication  of 
an  effort  to  give  the  banking  history  of  Canada, 
while  it  by  no  means  precludes  whatever  reference 
to  the  political,  economic,  or  banking^  history  of  the 
country,  may  serve  better  to  explain  the  measures 
adopted  by  legislatures.  Government,  post  office, 
or  other  savings  banks,  or  the  so-called  land  bank- 
jag,  will  not  be  treated,  for  the  inquiry  is  limited  to 
what,  in  the  English  sense,  are  denoted  by  the 
simple  expression  "banks,"  and  what,  in  Canada, 
have  been  joint-stock  banks  of  issue,  discount  and 
deposit,  incorporated  or  recognized  by  local  legisla 
tive  authority. 

The  Parliament  which  now  has  exclusive  juris 
diction  in  matters  incident  to  banking,  incorporation 
of  banks,  and  the  issue  of  paper  money,  is  of  as 
recent  origin  as  the  Dominion  of  Canada  itself. 
Thirty  years  ago,  neither  were  more  than  the  pro 
posals  of  a  group  of  energetic  and  far-seeing  colonial 
publicists.  The  territory  now  included  in  the 
Dominion  was  cut  up  into  six  or  more  different 
jurisdictions,  those  important  for  our  purpose  being 
the  provinces  of  Canada,  Nova  Scotia,  and  New 
Brunswick.  Fifty-four  years  ago,  the  Union  of  what 
are  now  the  provinces  of  Ontario  and  Quebec,  had 
not  been  accomplished,  and  these  parts  of  British 
North  America  were  separately  governed  as  the 
provinces  of  Upper  Canada  and  Lower  Canada. 
The  first  part  of  the  study,  accordingly,  will  be 
based,  not  on  the  uniform  legislation  of  a  great 
Dominion,  but  on  the  independent  and  somewhat 
diverse  statutes  of  four  distinct  colonies.  But  for 


Introduction  15 

reasons  which  will  be  explained  in  due  time,  events 
in  the  two  Canadas  and  in  the  late  Province  of 
Canada  are  facts  more  essential  to  a  right  under 
standing  of  what  may  be  called  the  national  era 
of  Canadian  banking  legislation,  than  the  course  of 
affairs  in  the  maritime  provinces  of  Nova  Scotia  and 
New  Brunswick.  So  while  significant  phenomena 
in  the  latter  colonies  should  not  be  neglected,  the 
earlier  inquiry  must  be  mainly  directed  to  the  de 
velopment  of  banking  legislation  in  the  Canadian 
provinces.  The  study  will  therefore  be  rightly  en 
titled  what  it  is,  as  well  in  its  first  part,  as  in  the 
last. 

Canadian  banking,  both  in  the  earlier  periods  of 
its  growth  and  the  present  stages,  has  often  been 
compared  to  Scotch  banking.  The  analogy  is  better, 
no  doubt,  than  that  between  Canadian  banking  and 
the  few  other  systems,  the  statutory  regulation  of 
which,  while  establishing  safeguards,  has  not  ham 
pered  the  prosecution  of  banking  business  in  all  its 
branches.  It  is  peculiarly  true  of  the  Scotch  banks 
that,  untrammelled  by  restrictions  and  unexploited 
by  government,  they  acquired  what  are  still  their 
distinguishing  characteristics,  in  the  exercise  of  all 
the  functions  which,  according  to  the  Anglo-Saxon 
idea,  belong  to  banking.  The  three  great  conditions 
of  their  development  were  freedom,  competition,  and 
the  necessity  promptly  to  perform  banking  contracts. 
The  result  was  a  system  of  banking  whose  principal 
features  were  the  small  number  of  banks,  their 
large  capitals,  establishment  and  operation  of  branch 
banks,  competitive  issue  of  notes  on  the  general 
credit  of  parent  banks,  payment  of  interest  on  de 
posits,  and  regular,  frequent  conduct  of  exchanges 


16  The  Canadian  Banking  System,  1817-1890 

between  the  banks.  It  is  true  that  both  in  the 
comparative  freedom  of  its  development,  and  in  the 
characteristic  features  which  it  displays  to-day,  the 
Canadian  system  is  very  like  the  Scotch. 

Still,  the  economic  needs  and  opportunities  which 
led  to  the  introduction  of  banking,  and  the  policy  of 
government  towards  this  form  of  economic  activity 
have  not,  of  course,  been  exactly  the  same  in  one 
country  as  in  the  other.  It  is  not  to  be  expected  that 
the  analogy,  however  close,  should  be  complete. 
Scotch  banking  is  a  development  which  may  be  de 
scribed,  with  a  tolerable  accuracy,  as  indigenous.  In 
Canada  the  needs  were  native,  but  the  banking  sys 
tem  was  borrowed,  copied,  transplanted,  if  you  like, 
from  countries  where  it  was  already  established. 
Eight  of  the  present  Scotch  banks  were  originally 
private  partnerships.  All  but  four  of  the  thirty- 
eight  Canadian  banks  were  from  the  outset  corpora 
tions  created  by  legislatures  or  by  Parliament.  By 
Sir  Robert  Peel's  measures  of  1845,  the  freedom  to 
issue  notes  was  abolished  in  Scotland,  and  thereby  a 
monopoly,  both  of  the  issue  and  of  other  depart 
ments  of  banking,  established  for  the  banks  then  in 
existence.1  Canada  has  preserved  not  only  compe 
tition  between  the  old  banks,  but  also  the  possibility 
to  found  new  ones,  while  the  effective  limitations 
upon  uncovered  note  issue  by  those  to  whom  the 
power  is  confirmed  are  not  statutory,  but  economic. 
There  is  no  requirement,  as  in  Scotland,  that  gold 
shall  be  held  in  the  banking  reserves  to  an  amount 
sufficient  to  cover  circulation  in  excess  of  a  certain 

1  Evidence  taken  before  the  Select  Committee  of  the  House  of 
Commons  on  Banks  of  Issue,  London,  1875;  Replies  to  questions 
954  and  955. 


Introduction  17 

fixed  amount,  and  during  the  last  forty  years  the 
total  amount  of  notes  outstanding  has  never  reached 
the  limit  to  which  the  banks  might  legally  issue. 
The  regulation  of  the  bank  note  currency  of  Scot 
land  by  the  Act  of  1845,  was  prompted  largely  by 
the  purpose  of  securing  in  that  the  same  fluctuations 
as  would  occur  in  a  metallic  circulation;  the  precau 
tions  adopted  in  Canada  were  designed  merely  to 
insure  the  immediate  convertibility  of  bank  notes  at 
all  times  and  places,  and  to  make  their  ultimate  pay 
ment  certain.  In  their  business  one  finds  still  other 
differences.  The  only  variety  of  Canadian  advance 
similar  in  form  to  the  Scotch  "cash  credit"  is  the 
overdrawn  account,  which  bankers  are  inclined  to 
discourage,  although  in  a  different  form,  especially 
in  their  business  with  farmers,  graziers  and  drovers, 
the  Canadian  banks  lend  freely  for  many  of  the  pur 
poses  which  the  "cash  credit"  has  served  in  Scot 
land.  Further,  the  banking  competition  in  Canada 
is  more  varied  and  intense.  It  prevents  the  adjust 
ment  of  the  minimum  rate  of  discount  and  the  maxi 
mum  interest  payable  on  deposits,  to  which  Scotch 
banks  regularly  agree,  and  by  which  they  stand. 

In  that  banking  operation  that  so  immediately 
interests  the  whole  public — the  issue  of  notes  to  cir 
culate  as  money — what  was  originally  substantial 
identity  has  been  altered  by  legislation.  The  early 
freedom  and  simplicity  of  the  Scotch  note  issue  has 
been  taken  away.  Because  the  Act  of  1845,1  as 
already  indicated,  requires  them  to  hold  gold  in  their 
banking  reserves  equal  to  the  circulation  in  excess  of 
their  authorized  issue,  the  Scotch  banks  can  no  longer 

J8  and  9  Vic.,  cap.  38,  An  Act  to  regulate  the  Issue  of  Bank  Notes 
in  Scotland. 

2 


18  The  Canadian  Banking  System,  1817-1890 

meet  the  temporary  but  periodical  demands  for  ex 
pansion  in  the  bank  note  currency  without  cost  or 
inconvenience  to  themselves.  Twice  each  year  must 
they  incur  the  expense  of  importing  quantities  of 
gold,  leaving  the  parcels  in  their  vaults  unopened 
and  unused,  and  exporting  them  again  when  the  cir 
culation  has  fallen  to  the  lower  level.  But  the  chief 
burden  which  is  thus  imposed  upon  the  Scotch  banks 
lies  in  this,  that  when  the  circulation  reaches  a 
certain  point,  its  further  temporary  expansion  is 
effected  only  at  the  expense  of  depleting  loanable 
funds  to  a  like  extent.  Such  restrictions  the  Cana 
dian  banks  have  escaped.  They  are,  to  be  sure, 
subject  to  statutory  provisions  as  to  the  total  issue  of 
each  bank,  the  redemption  of  notes  at  par  in  every 
part  of  the  country,  the  maintenance  of  a  common 
fund  to  guarantee  the  circulation,  and  the  prior  lien 
of  the  note  holder  upon  an  insolvent  bank's  estate. 
To  supply,  however,  the  recurrent  need  for  added 
currency  is  to  them  a  cause  of  no  real  cost,  while  to 
a  much  greater  extent  than  in  Scotland,  it  is  a  source 
of  direct  advantage.  It  is  important  to  note  that  in 
both  countries  the  public  share  this  advantage  ; 
through  elastic  issues  upon  their  general  credit, 
banks  are  enabled  to  minimize  fluctuations  in  the  rate 
of  discount,  to  reduce  or  waive  charges  that  other 
wise  they  would  be  obliged  to  make,  and  also  to 
maintain  branch  offices  at  small  points  which  other 
wise  would  be  inevitably  deprived  of  banking  facili 
ties. 

After  all,  however,  what  we  particularly  need  to 
know  in  judging  of  a  currency  is  comprised  in  the 
questions,  Is  it  ultimately  secure  ?  Is  it  immediately 
convertible  ?  and,  Is  it  elastic  ?  Whether  it  relates 


Introduction  19 

to  the  bank  notes  of  Canada  or  of  Scotland,  each  of 
these  queries  may  be  answered  in  the  affirmative; 
that  is  to  say,  each  country  has  a  safe  and  inexpen 
sive  currency  at  all  times  adequate  in  volume  and 
never  inflated. 

When  we  come  to  view  the  services  which  each 
country  has  derived  from  its  banking  system,  the 
analogy  reappears.  In  Canada,  as  in  Scotland,  the 
history  of  banking  records  singularly  few  frauds 
upon  the  currency,  and,  so  far  as  their  creditors  were 
concerned,  the  losses  inflicted  by  insolvent  bankers 
have  been  remarkably  slight.  In  order  to  reform  the 
system,  it  never  .became  necessary  to  maim  it;  in 
neither  country  has  banking  developed  the  abuses 
that, 

"  diseases  desperate  grown 

By  desperate  appliance  are  reliev'd, 

Or  not  at  all." 

Both  Scotch  and  Canadian  banks  collect  with  aston 
ishing  efficiency  the  disposable  capital  of  the  com 
munities  in  which  they  work,  and  utilize  it  in  assist 
ance  of  commercial,  industrial  and  agricultural 
enterprise.  Both  enjoy  the  firm  and  judicious  confi 
dence  of  the  people  whom  they  serve.  Both  have 
successfully  built  upon  the  foundations  of  their  capi 
tals  great  structures  of  credit  from  which  their 
clients  get  full  benefit.  Both  groups  conduct  the 
multifarious  exchanges  of  domestic  and  foreign  com 
merce  and  make  them  easy,  quick  and  cheap.  It 
may  be  said  that  these  are  the  tasks  of  any  banks. 
So,  indeed,  they  are,  but  "in  all  economical  and 
political  things,  questions  of  magnitude  and  intensity 
are  of  vital  importance;  the  question  very  often  is, 
not  what  color  a  thing  is,  but  what  shade  of  color."1 
1  Walter  Bagehot,  Evidence  ut  supra,  Reply  to  question  7,976. 


20  The  Canadian  Banking  System,  1817-1890 

The  real  advantages  of  either  system  appear  only 
after  it  is  seen  how  thoroughly  has  its  community 
acquired  the  depositing  habit;  what  support  do  bank 
customers  get  in  times  of  crisis  as  well  as  in  seasons 
of  prosperity;  how  nearly  is  the  rate  of  interest  uni 
form  throughout  the  country;  and  how  low  have 
charges  for  other  banking  services  been  reduced. 

Turning  now  to  consider  the  scientific  discussion 
evoked  by  each  system,  one  no  longer  sees  resem 
blance,  but  contrast,  and  that  of  the  most  marked 
sort.  Among  the  banks  of  the  old  world  none  have 
received  higher  praise  for  their  practical  services,  or 
more  thorough  approval  for  the  theoretical  excellence 
of  their  banking  system,  than  the  banks  of  Scotland. 
Sir  Walter  Scott  wrote  in  defence  of  the  system. 
Courcelle-Seneuil  admired  it.  Dr.  Adolph  Wagner 
has  praised  it.  And  in  every  treatise  on  banking 
theory  it  occupies  an  important  place.  But  outside 
of  a  few  published  addresses,  occasional  pamphlets, 
fugitive  magazine  articles,  and  the  newspaper  dis 
cussion  of  measures  proposed  to  Parliament,  the 
Canadian  banking  system,  in  scientific  works  at  least, 
has  remained  unnoticed,  undescribed,  unjudged. 
Abroad  it  has  been  easily  dismissed  as  "colonial." 
At  home  it  may  well  be  that  the  very  merits  of  the 
Canadian  banks  have  been  the  cause  of  this  neglect. 
To  say  that  Canadians  do  not  appreciate  their  bank 
ing  system  would  be  untrue;  they  have  repeatedly 
refused  to  give  it  up.  But  only  of  defective  institu 
tions  do  men  complain  and  agitate  for  reform;  good 
ones  they  often  accept  as  matters  of  course. 

The  purpose  of  this  monograph,  however,  is  to  de 
scribe  facts  relating  to  the  Canadian  banking  system, 
rather  than  to  eulogize  its  merits.  It  is  proposed  in 


Introduction  21 

the  next  two  chapters  to  examine  the  earlier  legisla 
tion  of  the  Canadian  colonies  and  the  forces  at  work 
in  its  development,  and  to  make  some  study  of  the 
crisis  of  1837  and  the  suspension  of  specie  payments. 
In  subsequent  chapters  the  reforms  embodied  in  the 
bank  charters  passed  prior  to  1867  will  be  pointed 
out,  and  the  efforts  to  introduce  "free  banking,"  as 
well  as  the  reasons  for  their  failure,  will  be  detailed. 
In  a  fifth  chapter  the  legislation  of  Nova  Scotia  and 
New  Brunswick  will  receive  the  necessary  attention. 
After  1867  the  uniform  and  general  Bank  Acts  of  the 
Dominion  will  need  extended  notice.  At  the  same 
time  the  various  attempts  to  alter  the  character  of 
the  system  will  be  described,  together  with  the  rea 
sons  for  the  policy  which  prevailed;  the  growth  in 
the  number  and  resources  of  the  banks  will  be  illus 
trated,  and  from  the  banking  history  such  facts  will 
be  given  as  will  explain,  in  part,  the  measures 
adopted  by  Parliament.  At  the  close  of  the  historical 
part  it  is  proposed  to  examine  with  greater  thorough 
ness  than  was  previously  possible,  the  characteristic 
features  of  the  present  Canadian  banking  system, 
and  some  of  its  practical  workings. 

Before  beginning  to  trace  the  development  of 
seventy-seven  years,  we  may  so  far  anticipate  as 
to  quote  certain  American  comments  upon  the  result: 

"We  know  of  no  system  that  more  closely  con 
forms  to  the  best  and  broadest  economic  ideals  of 
banking;  none  better  calculated  to  afford  the  largest 
possible  public  accommodation;  none  better  adapted 
to  insure  a  safe  utilization  of  the  surplus  balances  of 
the  people;  and  none  better  qualified  to  supply  tlie 
daily  fluctuating  wants  of  trade  with  a  safe  and 
convenient  circulating  medium.''1 

1  N.  Y.  Daily  Commercial  Bulletin,  18th  January,  1890. 


CHAPTER  II 
THE  EARLY  BANKS  IN  LOWER  CANADA 

§1 THE    FIRST    BANKS 

THE  cause  of  the  first  considerable  effort  to  estab 
lish  a  bank  of  issue,  discount  and  deposit  in  the 
present  province  of  Quebec,  was  the  scarcity  and 
variety  of  specie  in  circulation;  the  scene,  the  city  of 
Montreal;  the  time,  18th  October,  1792.  In  the  official 
Gazette  of  that  date  appeared  the  following  circular: 

"The  undersigned,  having  experienced  great  inconvenience  in 
Canada  from  the  deficiency  of  specie  or  some  other  medium  to 
represent  the  increasing  circulation  of  the  country,  as  well  as  from 
the  variety  of  the  money  now  current,  and  knowing  the  frequent- 
loss  and  general  difficulty  attending  receipts  and  payments,  have 
formed  the  resolution  of  establishing  a  Bank  at  Montreal,  under 
the  name  of  the  'Canada  Banking  Company.' 

"The  business  proposed  by  the  company  and  usually  done  by 
similar  establishments,  is — 

"To  receive  deposits  in  cash. 

"  To  issue  notes  in  exchange  for  such  deposits. 

"To  discount  bills  and  notes  of  hand. 

"To  facilitate  business  by  keeping  cash  accounts  with  those  who 
choose  to  employ  the  medium  of  the  Bank  in  their  receipts  and 
payments. 

"It  is  proposed  to  extend  the  operations  of  the  Bank  to  every 
part  of  the  two  provinces  where  an  agent  may  be  judged  necessary; 
and  it  is  presumed  that  the  institution  will  be  particularly  bene 
ficial  to  the  commerce  of  and  intercourse  with  the  Upper  Province. 
"(Signed)  PHYN,  ELLICE  &  INGLIS, 

"TODD,   MCGILL&  CO., 

"FoRSYTii,  RICHARDSON  &  Co." 

The  firms  who  issued  the  circular  did  not  carry 
out  their  plans.  A  private  bank,  chiefly  of  deposit, 
was  the  only  result  of  their  endeavors.1 

1  James  Stevenson,  "The  Currency  of  Canada  after  the  Capitula 
tion,"  Transactions  of  the  Literary  and  Historical  Society  of  Que 
bec,  1876  7,  p.  122. 


The  First  Banks  23 

The  unsatisfactory  condition  of  the  currency  con 
tinued,  aggravated  somewhat  by  the  export  of  gold 
to  the  United  States.  The  rates  in  the  colonial 
money  of  account,  at  which  certain  American, 
British,  Portuguese,  French  and  Spanish  coins  were 
legal  tender,  were  altered  in  1795,  and  the  legal  ratio 
of  gold  to  silver  somewhat  bettered  in  order  to  keep 
the  gold  in  the  country.  Some  relief  was  afforded 
by  the  measure,  but  the  commerce  of  the  colony  was 
growing.  The  enterprise  of  Scotch  and  English 
immigrants,  as  well  as  of  refugees  from  the  former 
colonies  south  of  Canada,  had  assisted  also  in  the 
considerable  agricultural  development.  The  new 
activities  needed  facilities  for  exchange,  and  the 
country,  as  yet,  could  ill  afford  the  luxury  of  a 
metallic  circulating  medium.  A  second  attempt  to 
found  a  bank  of  issue  occurred  6th  March,  1807,  at 
a  meeting  in  the  city  of  Quebec,  assembled  in  re 
sponse  to  a  call  in  the  Quebec  Gazette  of  the  4th 
March.  But  110  bank  was  established. 

The  next  year,  in  February,  a  petition  of  divers 
inhabitants  of  the  cities  of  Quebec  and  Montreal, 
praying  to  be  incorporated  under  the  title  of  the 
"Canada  Bank,"  was  presented  to  the  provincial 
legislature.1  A  special  committee,  to  whom  the 
matter  was  referred,  reported  favorably  with  a  bill. 
Many  objections  were  offered,  most  of  them  ill  taken 
from  a  more  modern  point  of  view,  and  the  bill  failed 
to  pass. 

From  July,  1812,  until  the  latter  months  of  1815, 
the  Canadian  colonists  used  a  currency  composed  for 
the  most  part  of  promissory,  legal  tender  "Army 
Bills"  issued  by  the  government  as  a  financial  aid 

1  James  Stevenson,  ut  supra,  p.  132. 


24  The  Canadian  Banking  System,  1817-1890 

in  the  war  with  the  United  States.  This  currency, 
though  slightly  depreciated,  had  the  merit  of  being 
uniform  and  expressed  in  the  convenient  denomina 
tions  of  the  colonial  currency.  Bills  for  $25  and 
over  bore  interest  at  6  per  cent.  All  notes  were 
received  for  public  dues  and  were  convertible  into 
government  bills  of  exchange  on  London  at  thirty 
days  sight,  at  the  rate  of  exchange  as  fixed  by 
authority,  or  into  cash,  at  the  option  of  the  com 
mander  of  the  forces.  As  the  rate  was  fixed  by 
commissioners,  whose  duty  was  to  make  the  fairest 
possible  approximation  to  the  market  rate  of  ex 
change,  the  holders  of  the  army  bills  had  slight 
cause  for  complaint.  At  the  close  of  the  war,  the 
outstanding  issues,  amounting  to  £1,249,996  cur 
rency  in  March,  1815,  were  reduced  through  rapid 
redemption  to  less  than  £200,000  currency  by  May, 
1816. 1  The  office  of  issue  was  finally  closed  24th 
December,  1820.2 

Canadian  currency,  more  often  called  Halifax  currency,  was  an 
arbitrary  money  of  account  used  in  all  the  larger  British  North 
Amercian  provinces  until  the  decimalization  of  the  currencies  in 
the  early  fifties  of  the  present  century.  The  denominations  were 
dollars,  pounds,  shillings,  and  pence;  the  table  12d.  =  l  shilling, 
20s.  =£1,  5s.  =$1,  the  dollar  being  originally  the  Spanish  pillar 
dollar,  coined  before  1772  and  containing  385  grains  fine  silver. 
This  currency  was  established  for  the  province  of  Canada  by  an 
ordinance  of  1765,  which  changed  the  monetary  nomenclature  from 
French  to  English,  but  adopted  as  money  unit  a  shilling,  equal  in 
value  to  the  old  French  livre;  vide  Stevenson,  op.  cit.  p.  124.  The 
unit  was  often  altered  slightly,  and,  after  the  debasement  of  the 
American  coinage,  in  1834,  was  reduced  so  that  the  dollar  unit  of 
the  two  systems  would  correspond.  In  1841  the  £  sterling  wras 
reckoned  at  24s.  4d.  currency;  the  dollar  (U.  S.)  at  5s-  Id.,  but  after 
1850  at  5s. 

2For  complete  details  respecting  this  issue,  including  all  the 
important  documents,  vide  Stevenson,  "The  Circulation  of  the 
Army  Bills  with  some  Remarks  upon  the  War  of  1812,"  Trans 
actions,  ut  supra,  1891-92,  p.  30. 


The  First  Banks  25 

The  contraction  of  the  Army  Bill  circulation 
caused  inconvenience  in  Upper  Canada,  and  the 
Lower  Province,  with  its  greater  trade,  suffered  still 
more.  Soon  after  the  redemption  was  practically 
complete,  the  bank  question  was  revived.  But  the 
participants  in  the  next  attempt  to  establish  a  bank 
published  no  detailed  expose  of  their  motives.  Nor 
did  they  seek  the  parliamentary  consent  of  the  leg 
islature.  They  simply  began  their  business.  On 
the  23d  of  June,  1817,  a  company  of  persons  met  at 
Montreal  and  signed  articles  of  agreement  by  which 
an  association  was  formed,  with  a  joint  and  trans 
ferable  stock,  limited  to  £250, 000. J  Late  in  August 
the  new  association  opened  an  office  as  the  Bank  of 
Montreal.  And  this,  the  first  bank  of  discount, 
deposit  and  issue  to  be  established,  either  in  Lower 
Canada,  Upper  Canada,  Nova  Scotia  or  New  Bruns 
wick,  is  to-day  the  greatest  bank,  not  only  in  the 
Canadian  Dominion,  but  in  the  whole  of  North 
America. 

An  act  incorporating  the  association  was  passed  in 
the  next  session  of  the  legislature,  but  was  reserved 
by  the  governor  for  the  signification  of  the  royal 
pleasure.  The  royal  assent  was  withheld  and  the 
Bank  of  Montreal  continued  as  a  private  partnership. 
•  The  example  set  by  Montreal  was  followed  the  < 
next  summer  by  citizens  of  Quebec.  Articles  of 
association  of  the  Quebec  Bank  were  signed  9th 
July,  1818.  Directors  were  elected  in  September,2 
and  this  bank  also  started  as  a  private  partnership, 
its  capital  being  limited  to  £75,000.  The  members 

Journal,  L.  C.,  1820-1821,  p.  103. 

2 The  Shareholder  and  Insurance  Gazette,  September  12,  1890,  "The 
Quebec  Bank,"  by  an  anonymous  writer,  known,  however,  to  have 
access  to  the  records  of  the  institution. 

~**~~^~~~  L  ^^l» 

<^f-^i>  ^^""^-^iS^s^ 
'•  V"  0?  «» 
ifUHIVERSITVl 

I 


\ 


26  The  Canadian  Banking  System,  1817-1890 

of  the  association  applied  for  incorporation  in  1819, 
without  success,  however,  for  the  bill  failed  even  to 
come  before  the  committee  of  the  whole  house. 

A  third  bank  was  organized  by  another  group  of 
Montreal  citizens  on  the  25th  August,  1818,  as  the 
Bank  of  Canada,  the  capital  limit  of  which  was 
finally  set  at  £200,000.  This  bank,  too,  applied  for 
a  charter,  but  failed  to  secure  it.1 

Finally,  in  the  winter  of  1820-21,  the  shareholders 
of  each  of  the  three  banks  thus  established  again 
petitioned  the  legislature  to  be  erected  into  bodies 
corporate  and  politic.  They  recited  in  effect  that 
their  capital  stocks  had  been  all  subscribed,  that  the 
portion  of  which  the  payment  was  required  by  the 
articles  of  agreement  had  been  paid  in,  that  they  had 
been  engaged  for  some  years  in  the  business  of  bank 
ing,  and  that,  without  the  benefit  of  incorporation, 
the  beneficial  purpose  contemplated  by  the  establish 
ment  of  the  banks  would  be  imperfectly  attained, 
and  great  inconveniences  would  be  incurred  in  the 
conduct  of  their  business.2  They  prayed,  therefore, 
to  be  incorporated  under  regulations  and  provisions 
as  nearly  corresponding  with  the  terms  of  their  origi 
nal  association  as  might  be,  and  under  such  other 
regulations  and  provisions  as  the  legislature  might 
prescribe. 

The  prayers  of  the  petitioners  were  granted.  On 
the  17th  March,  1821,  three  charters  incorporating 
the  several  banks  were  presented  by  the  legislature 
for  the  royal  assent.  Being  reserved  by  the  gov 
ernor,  the  charters  did  not  become  law  for  over  a 
year.  "An  Act  to  incorporate  certain  persons  therein 

1  Journal,  L.  C.,  1820-21,  p.  40. 
2lbid,  pp.  40,  48,  103. 


The  First  Charters  27 

named  under  the  name  of  {  The  President,  Directors 
and  Company  of  the  Bank  of  Montreal'"  (1  Geo. 
IV,  cap.  25,  L.  C.)  was  proclaimed  the  22d  July,  1822. 
Similar  statutes  respecting  the  Quebec  Bank  (1  Geo. 
IV,  cap.  26,  L.  C.),  and  the  Bank  of  Canada  (1  Geo. 
IV,  cap.  27,  L.  C.)  were  proclaimed  on  the  30th 
November  of  the  same  year.1 


§2. THE    FIRST    CHARTERS 

Save  in  regard  to  the  amounts  of  their  capital,  the 
location  of  the  banks  and  the  conditions  as  to  the 
residence  of  the  directors,  the  provisions  of  the  three 
charters  were  practically  identical.  The  charter  of 
the  Bank  of  Montreal  may  be  taken  as  the  type. 
The  preamble  declared  the  "advancement  of  agri 
culture  and  commerce  and  the  promotion  of  the  pros 
perity  of  the  province "  to  be  the  motives  for  the 
legislation.  One  hundred  and  forty-four  persons, 
then  the  stockholders  of  the  company,  their  succes 
sors  and  assigns,  were  created  in  this  instance  a  body 
corporate  and  politic,  with  corporate  powers  continu 
ing  to  the  1st  June,  1831.  Their  capital  stock  was 
limited  to  £250,000  currency,  the  whole  to  be  paid  in 
by  annual  instalments  of  not  more  than  10  per  cen,t. 
within  nine  years  from  the  passing  of  the  act. 

Thirteen  directors,  British  subjects,  residents  of 
Montreal  for  at  least  three  years,  or  sometime  resi 
dents  of  Montreal  for  three  years,  and  of  the  pro 
vince  for  seven  years,  and  holders  of  at  least  four 
shares  each,  were  to  be  annually  elected  by  such 
shareholders  as  were  British  subjects.  Nine  of  the 
directors,  including  the  president  and  vice-president, 
Statutes  of  Lower  Canada,  vol.  xi,  1821-24,  following  p.  248. 


28  The  Canadian  Banking  System,  1817-1890 

were  to  be  re-elected  to  the  board  each  year.      The 
directors  were  forbidden  to  act  as  private  bankers 
during  their  term  of  office,  were  to  appoint  the  officers 
necessary  for  the  bank,  and  to  require  of  them  bonds 
adequate  to  their  trust.      They  were  to  receive   no 
salary  except  by  a  vote  of  the  shareholders  in  general 
meeting,  to  declare  half-yearly  dividends  out  of  the 
profits  of  the  bank,  but  never  to  encroach  upon  its 
capital,  to  keep  a  book  for  the  registry  of  transfers 
of  stock,  to  have  the  right  to  inspect  the  books,  cor 
respondence   and   funds  of  the  corporation,    and    to 
present  to  the  annual  general  meetings  of  the  stock 
holders  exact  and  particular  statements  of  the 
Debts  due  to  and  by  the  bank, 
Amount  of  bank  notes  in  circulation, 
Amount  of  probably  bad  or  doubtful  debts, 
Surplus  or  profit,  if  any  remaining,  after  deduction 
of  losses  and  provision  for  dividends. 

The  directors,  further,  were  to  be  liable  for  the 
excess  in  their  natural  capacities  (i.  e.,  individually 
and  jointly),  as  well  to  the  stockholders  as  to  the 
holders  of  bank  notes,  in  case  the  debts  of  the  corpo 
ration  by  bond,  bill  or  note,  or  any  contract  whatso 
ever,  should  exceed  treble  the  amount  of  the  capital 
stock  actually  paid  in,  over  and  above  a  sum  equal  to 
such  money  as  might  be  deposited  with  the  bank  for 
safe-keeping.  But  individual  directors  in  opposition 
might  exonerate  themselves  from  this  liability  by 
publishing  within  eight  days  from  the  time  of  the 
illegal  transaction,  a  statement  thereof  and  their  pro 
test  against  it. 

The  stock  of  £250,000  was  divided  into  5,000  shares 
of  £50  each.  The  shareholders  were  to  vote  at  all 


The  First  Charters  29 

meetings  in  the  following  proportions  to  stock  owned: 
for  1-2  shares  the  holder  had  1  vote. 
"  each  2  "      from  3-10  shares,  inclusive,  1  vote 
*<      «     4  "         "    11-30       «*  1     " 

"      "     6  "         "    31-60  1      " 

«      "     8  "         "    61-100     "  1     k< 

The  holders  of  10  shares  would  thus  have  5  votes;  of 
30,  10;  of  60,  15;  of  100,  20  votes.  No  shareholder 
was  to  have  more  than  twenty  votes.  Proxies  for 
absent  shareholders  were  permitted.  This  voting 
scale,  designed  to  reduce  the  influence  of  large  share 
holders  in  the  directorate,  was  adopted  in  all  the 
charters  granted  by  Lower  Canada.  After  the  first 
election  of  directors  a  share  was  not  to  entitle  the 
holder  to  vote  unless  held  for  three  months  prior  to 
the  meeting.  Fifty  shareholders,  having  not  less  than 
150  shares,  might  call  a  special  meeting  of  share 
holders,  at  which  a  majority  might  suspend  or  remove 
directors  guilty  of  malfeasance.  Transfers  of  stock 
were  not  to  be  valid  and  effectual  unless  registered  at 
the  office  of  the  bank,  nor  until  the  transferor  should 
have  discharged  all  debts  by  him  then  due  to  the 
bank  which  might  exceed  the  remaining  stock  be 
longing  to  him.  Fractional  shares  were  not  transfer 
able.  Shares  were  made  personal  property  and  liable 
to  bond  fide  creditors  for  debt.  They  might  be 
attached  and  sold  under  a  writ  of  attachment  and 
execution  served  upon  the  cashier  of  the  bank. 
Failure  to  pay  the  instalments  on  the  shares  as  they 
became  due  involved  a  penalty  in  favor  of  the  bank 
of  5  per  cent,  on  the  amount  of  the  delinquent's  stock, 
as  well  as  upon  his  dividends  due  at  the  time,  and 
those  accruing  before  his  payment  of  the  instalment. 
But  the  shareholders  were  exempt  from  individual 


30  The  Canadian  Banking  System,  1817-1890 

liability  for  the  debts  of  the  bank,  even  when  these 
exceeded  thrice  the  capital  stock  paid  in  plus  the 
specie  deposited  for  safe-keeping.  The  shareholders, 
therefore,  were  incorporated  with  limited  liability, 
and  enjoyed  the  extensive  privilege  of  a  liability 
limited,  not  to  double  the  amount  of  their  subscrip 
tions,  but  merely  to  the  amount  of  their  subscribed 
shares. 

The  corporation  thus  created  was  empowered: 
to  hold  real  estate  to  the  value  of  £1,000  yearly 

and  no  more; 

to  sue  and  be  sued  in  the  name  of  the  President, 
Directors  and  Company  of  the  Bank  of  Mon 
treal; 

to  issue  promissory  notes  intended  to  circulate  as 
money  and  payable  on  demand  in  gold  and  sil 
ver  coin  current  by  the  laws  of  the  province; 
to  receive  deposits  and  to  deal  (a)  in  bills  of  ex 
change,  (b)  in  discounting  notes  of  hand  and 
promissory  notes  and  to  receive  the  discount 
at  the  time  of  negotiating,  (c)  in  gold  and  silver 
coin  and  bullion,  and  (d)  in  the  sale  of  stock 
pledged  for  money  lent  and  not  redeemed; 
to  take  and  hold  mortgages  and  hypotheques  on 
real  property  for  debts  contracted  to  it  in  the 
ordinary  course  of  its  dealings,  but  on  no 
account  to  lend  on  land,  mortgage  or  hypotheque, 
nor  to  purchase  them  on  any  pretext  except  as 
here  permitted. 

Obligations,  bonds  and  bills  of  the  bank,  whether 
obligatory  or  of  credit,  under  its  common  seal,  signed 
by  the  president  or  vice-president,  and  counter 
signed  by  a  cashier,  were  assignable  by  indorsement 


The  First  Charters  31 

of  the  person  to  whom  they  were  made,  any  law, 
custom  or  usage  to  the  contrary  notwithstanding. 
And  notes  or  bills,  promising  the  payment  of  money 
to  any  person  or  persons,  his,  her  or  their  order, 
issued  by  the  order  of  the  bank,  and  similarly  signed, 
though  not  under  seal,  were  to  be  binding  and  oblig 
atory  and  assignable  and  negotiable,  by  blank  or 
other  indorsement,  "in  like  manner,"  the  charter 
reads,  "as  foreign  bills  of  exchange  now  are."  Bills 
payable  to  bearer  were  assignable  by  delivery  only. 
These  details,  however,  are  but  incidental  to  ques 
tions  of  banking;  they  belong  rather  to  the  law  of 
commercial  paper  in  which,  at  that  time,  the  legisla 
ture  was  obliged  to  establish  some  new  precedents. 

The  other  restrictions  upon  the  bank  were  very  few. 
The  prohibition  of  loans  upon  land  and  mortgage  has 
been  cited;  so  too  the  limit  upon  the  real  estate  which 
might  be  owned  by  the  bank.  It  was  forbidden  to 
engage  in  business  other  than  that  specified  in  the 
grant  of  powers,  i.  e.,  the  ordinary  banking  trans 
actions.  It  might  not  demand  or  receive  more  than 
the  lawful  interest  of  6  per  cent,  per  annum  in  any 
of  its  dealings.  The  bank's  total  debts  were  not  to 
exceed  treble  the  amount  of  the  capital  stock  actually 
paid  in,  plus  a  sum  equal  to  moneys  deposited  with  it 
for  safe-keeping.  It  might  not  raise  loans  of  money 
or  increase  its  capital,  and  upon  pain  of  the  forfeit 
ure  of  its  charter  the  bank  was  forbidden  to  loan 
money  to  a  foreign  state.  No  penalty  whatever  was 
attached  to  the  other  prohibitions,  save  the  individual 
liability  of  directors  in  case  the  aggregate  debts  of 
the  bank  exceeded  thrice  the  paid  up  capital  stock. 

"For  the  better  security  of  the  public,"  the  gov 
ernment,  or  either  branch  of  the  Provincial  Parlia- 


32  The  Canadian  Banking  System,  1817-1890 

ment,  was  empowered  from  time  to  time  to  require 
from  the  bank  statements,  under  oath,  of  the  capital 
stock,  debts  due  to  the  bank,  moneys  deposited  in  it 
and  notes  in  circulation.  On  the  other  hand,  the 
legislature  provided,  in  the  bank's  behalf,  extraordi 
nary  penalties: 

(a)  Against  forgery  of  the  seal  or  bonds  or  bills  of 
the  bank,  or  knowingly  passing  forgeries,  viz.,  from 
six  months'  to  six  years'  imprisonment  at  hard  labor, 
or  public  whipping,  or  standing  in  the  pillory,  or  one 
or  more  of  the  punishments  at  the  discretion  of  the 
court; 

(b)  Against  making  or  engraving  plates  or  tools 
for  counterfeiting  the  bills,  notes  or  undertakings  of 
the  bank,  or  having  in  one's  possession  plate 
presses  or  tools,  with  the  intention  of  so  coity*-,      jit- 
ing,  viz.,  death  as  a  felon,  without  benefit  ok-\;Ui*gy. 

The  rights  of  the  King  and  other  bodies  corporate 
and  politic  were  saved  by  section  xyii.  In  section 
xxi,  the  duration  of  the  act  is  limited  to  1st  June, 
1831,  and  it  is  further  provided  "that  if,  before  the 
expiration  of  that  period,  it  shall,  at  any  time,  be 
found  expedient  to  establish  a  Provincial  Bank  in  this 
Province,  and  that  the  same  be  so  established  by  an 
Act  of  the  Legislature,  the  corporation  of  the  Bank  of 
Montreal  shall,  from  and  after  the  expiration  of  seven 
years  from  the  passing  of  such  Act,  be  dissolved." 

The  Quebec  Bank  was  incorporated  with  a  capital 
stock  limited  to  £75,000  currency,  in  3,000  shares  of 
£25  each,  all  to  be  paid  up  within  nine  years;  the 
Bank  of  Canada,  with  a  stock  of  £200,000,  in  4,000 
shares  of  £50  each.  In  other  respects  the  charters 
are  substantially  similar  to  that  of  the  Bank  of 
Montreal. 


Characteristics  of  the  Early  Banking  System  33 

§3.  -  CHARACTERISTICS    OF    THE    EARLY    BANKING 
SYSTEM 

From  the  preceding  account  it  may  be  seen  how 
simple,  in  many  ways  how  lax.  were  the  charters 
under  which  incorporated  banks  first  operated  in 
Lower  Canada.  The  shareholders  were  liable  only 
for  the  amount  of  their  subscriptions  to  the  stock. 
There  was  no  limit  to  the  note  issue  other  than  the  » 
provision  restricting  the  aggregate  of  debts.  There  ' 
was  no  process  whereby  to  establish  the  payment  in 
specie  of  the  capital  stock.  There  was  nothing  to 
prohibit  loans  upon  the  security  of  the  bank's  stock, 
or  to  prevent  the  capital,  once  paid  in,  from  being 
loaned  out  bodily  to  the  directors.  The  publication  of 
freo  ";  and  periodical  statements  of  the  condition  of 
the-;  -'-s  was  not  required,  nor,  except  in  the  case  of 
loai,s  io  a  foreign  state,  did  the  charters  enforce 
by  any  penalty  the  prohibitions  and  restrictions  that 
were  laid  down. 

It  must  be  remembered,  however,  that  the  several 
charters  were  based  upon  articles  of  agreement  drawn 
up  by  the  parties  petitioning  for  incorporation;  that 
Canadians  in  1820  had  had  little  cause  for  inquiring 
into  either  the  theory  of  banking  or  the  law  which 
should  govern  banks.  Any  advantage  in  knowledge 
of  this  sort  doubtless  belonged  to  those  who  first 
entered  the  business.  In  drafting  the  articles  so  as 
best  to  further  their  profit,  they  naturally  omitted 
many  restrictions  which,  afterwards,  and  from  a 
public  standpoint,  were  found  to  be  desirable.  Either 
through  ignorance  or  carelessness  the  legislature  of 
1820-21  failed  to  fill  up  the  gaps.  But  to  criticise 
their  action  at  this  point  will  merely  involve  repeti 
tion.  The  whole  subsequent  history  of  Canadian 
3 


34  The  Canadian  Banking  System,  1817-1890 

banking  legislation  is  a  criticism  upon  these  early 
charters,  and  a  criticism  derived,  not  a  priori,  but 
from  experience. 

In  their  constitution  and  variety  of  function,  in  the 
simplicity  of  the  law  regulating  them,  the  first  Cana 
dian  banks  more  closely  resemble  the  chartered  banks 
of  Scotland  than  any  similar  institutions  then  in 
existence.  The  likeness  is  due  to  more  than  the 
reliance  which  Canada  has  usually  placed  upon 
British  precedents  in  matters  as  yet  untreated  in  her 
own  law.  It  must  be  explained,  in  large  part,  by  the 
number  of  Scotchmen  interested  in  these  early  banks. l 
Having  brought  from  their  native  land  the  knowledge 
of  such  institutions,  they  sought  in  the  colonies  to 
extend  and  to  perpetuate  for  the  farmer  and  merchant 
the  benefits  and  stimulus  of  a  system  the  worth  of 
which  Scotland's  prosperity  could  abundantly  prove. 

That  the  early  charters  embodied  many  of  the  more 
essential  principles  of  Canadian  banking  and  Cana 
dian  banking  law  will  be  recognized  as  we  trace  the 
later  growth.  One  such  principle  is  the  issue  of  notes 
against  the  general  assets  of  the  bank,  or  in  different 
phrase,  on  the  general  credit  of  the  bank;  another, 
the  requirement  of  a  large  capital  foundation,  both 
to  strengthen  the  credit  of  the  bank  by  a  heavy  guar 
antee,  and  to  provide  sufficient  funds  for  its  opera 
tions.  A  third  is  the  plan  of  granting  each  new  bank 
a  separate  charter,  a  method  by  which  some  assur 
ance  may  be  had  that  the  incorporated  are  worthy 
of  their  privileges.  Again,  a  fourth  is  the  principle 
of  accountability  to  the  government,  destined  to  find, 

1Among  the  one  hundred  and  forty  odd  charter  members  of  the 
Bank  of  Montreal  there  were  at  least  ninety  Scotch  names.  Of  the 
eighty -nine  incorporated  as  the  Quebec  Bank,  no  less  than  thirty 
were  Scotch.  Statutes  ut  supra. 


Environment  of  the  Banks  35 

under  the  Dominion  laws,  complete  and  frequent 
expression  in  the  requirement  of  a  monthly  return  to 
the  Minister  of  Finance. 

The  banks  themselves  sooft  introduced  some  of  the 
more  fundamental  features  of  Scotch  banking.  The 
Bank  of  Canada  placed  an  agent  at  Kingston,  in 
Upper  Canada.1  The  Bank  of  Montreal  established 
an  office  of  discount  and  deposit  at  Quebec,  and 
employed  one  agent  at  Kingston,  and  another,  for  the 
negotiation  of  sterling  exchange,  in  the  city  of  New 
York.2  The  several  banks  were  accustomed  to  receive 
in  payment  the  notes  of  their  competitors  and  other 
demands  upon  them,  exchange  these  against  claims 
on  themselves  and  exact  the  payment  of  balances  in 
specie  as  often  as  once  a  week.3  Thus  was  begun 
the  practice  of  branch  banking,  one  of  the  most  use 
ful  features  of  the  Canadian  system  to  the  public  no 
less  than  to  the  banks,  and  the  conduct  of  exchanges 
between  the  banks.  By  the  latter  Canadians  have 
secured  frequent  and  rigid  tests  of  the  solvency  of 
the  participants  and  an  efficient  safeguard  against 
augmentation  of  the  note  issue  in  excess  of  the  needs 
of  trade. 


£4.  —  ENVIRONMENT    OF    THE    BANKS 

To  depict  the  condition  of  the  country  in  which  the 
persistent  enterprise  of  the  British  colonists  had  at 
last  secured  the  new  banking  institutions,  is  a  task 
for  the  economic  historian  rather  than  for  these 
pages.  He  may  describe  in  detail  its  commerce,  and 

Journal,  L.  C.,  1826,  Appendix  K. 
-Journal,  L.  C  ,  1830,  Appendix  K. 

3Journal,  L.  C.,  1829,  Appendix  HH,  Resolve  of  the  Board  of  the 
Bank  of  Montreal,  28th  January,  1820. 


36  The  Canadian  Banking  System,  1817-1890 

mark  how  far  had  proceeded  its  development  in  agri 
culture  and  manufactures .       But  whatever  else  may 
be  told,  it  is  certain,  at  least,  that  from  1820  to  1830, 
the  province  of  Lower  Canada  was  not  far  advanced. 
In  commercial  activity  and  general  economic  devel 
opment  it  was  much   inferior  to  the   state  of  New 
York  on  its  southwestern  border,  and  the  comparison 
with  Ohio  in  the  later  years  of  the  decade  would  have 
been    distinctly  unfavorable.     It  had  suffered  from 
commercial  restrictions,   from   the  simplicity,   igno 
rance  and  fixed  habits  of  the  French  habitants,  from 
its  severe  climate  and  from  the  checks  imposed  by 
an  absorbing  political  strife.     The  cause  of  the  last 
was  the  race  question,  the  deep  seated  enmity  between 
the  British  immigrants   and  the  descendants   of  the 
conquered  French.     That  enmity  was  embittered  by 
the  ascendancy  which  unjust  favoritism  of  the  royal 
governors  had  helped  to  give  the  British  in  the  gov 
ernment  and  the  profession  of  law,  and  which  "their 
own   superior  energy,    skill   and   capital,  secured   to 
them  in  every  branch  of  industry."   Continuing,  in 
his  report  of  1839,  Lord  Durham  remarked  that  "they 
(the  English)   have  developed  the  resources  of   the 
country,  they  have  constructed  or  improved  its  means 
of  communication,  they  have  created  its  foreign  com 
merce.   The  entire  wholesale  and   a  large  portion  of 
the  retail  trade   of  the  province,  together   with  the 
most   profitable    and   flourishing    farms,    are  in   the 
hands  of  a  numerical  minority  of  the  population."1 

The  chief  export  trade  of  the  city  of  Quebec  was 
in  timber,  that  of  Montreal  in  furs.  Ginseng,  potash 

1  Report  on  the  Affairs  of  British  North  America,  from  the  Earl  of 
Durham,  Her  Majesty's  High  Commissioner,  etc.,  Montreal,  1839, 
pp.  14  and  10. 


Practice  of  the  Banks  37 

and  grain  came  next  in  importance.  The  imports 
consisted  mainly  of  dry  goods,  hardware,  spirits, 
sugar  and  such  necessary  commodities  as  the  colo 
nists  were  not  in  a  position  to  produce  for  themselves. 
The  total  discounts  of  the  banks,  exclusive  of  the 
Bank  of  Canada,  which  did  not  report  to  the  legisla 
ture  in  1830,  were  as  follows: 

Year  Quebec  Bank1     Bank  of  Montreal2 

1821 £    699,969 

1822 1,120,649 

1823 £221,252  1,173,467 

1824  319,948  1,705,163 

1825 ,  444,141  1,851,559 

1826 456,538  1,354,024 

1827 .,...  438,134  1,174,971 

1828 430,094  1,377,483 

1829 ." 484,611  1,559,683 

1830 526,870 

The  colony  was  extremely  dependent  upon  the 
mother  country,  and  when  crises  or  commercial  dis 
turbances  occurred  in  England  Canada  suffered 
sorely.  A  striking  indication  of  this  dependence  is 
the  fact  that  for  two  years  after  the  disastrous  Eng 
lish  collapse  of  1825  the  Bank  of  Montreal  was 
obliged  to  pass  its  dividends,  owing  to  losses  on  mer 
chants'  exchange  incurred  in  the  panic  year.3 


§5. PRACTICE  OF  THE  BANKS 

In  exchange  the  Bank  of  Montreal  was  the  largest 
dealer,  though  the  Bank  of  Canada  joined  in  the 
business  of  buying  and  selling  merchants'  exchange 
and  the  commissariat  bills  of  the  government,  and  of 

Journal,  L.  C  ,  1831,  Appendix  M. 
'Journal,  L.  C.,  1831,  Appendix  N. 
3 Journal,  L.  C.,  1829,  Appendix  HH. 


38  The  Canadian  Banking  System,  1817-1890 

furnishing,  when  required,  their  own  drafts  upon 
London.1  The  former  bank  employed  its  New  York 
agents  for  operations  in  the  American  market,  fre 
quently  more  favorable,  in  matters  of  sterling  ex 
change,  than  that  of  Lower  Canada.  It  also  remitted 
bills  direct  to  England  against  its  own  imports  of 
specie,  colonial  imports  of  goods  or  adverse  balances 
otherwise  incurred.2 

I  have  previously  noticed  the  appearance  in  Cana 
dian  practice  of  the  vital  features  of  branch  banking 
and  a  system  of  frequent  exchanges  and  note  re 
demptions  conducted  by  the  banks  themselves.  The 
plan  of  using  New  York  as  a  market  for  sterling 
bills,  a  source  for  the  supply  of  specie  and  a  center 
for  the  employment  at  call  of  portions  of  the  bank's 
reserve  funds,  has  been  followed  by  the  greater  banks 
since  its  introduction.  An  idea  of  the  extent,  at 
least,  of  the  business  carried  on  by  the  three  banks 
can  best  be  conveyed  by  the  following  returns  to  the 
legislature  for  1824-1826,  1829-1831. 

Journal,  L.  C.,  1823-24,  p.  284. 

2For  example  the  Bank  of  Montreal  in  its  exchange  business  in 

1827          1828  1829 

Bought  of  the  government £47,000     £36,900    £145,000 

"  private  bills 18,729       44,367         60,610 

Drew  of  its  own  bills 40,951       62,472       100,581 

Sold  of  its  own  in  the  United  States.   . .      16,000       42,200         58,800 

"    the  government  bills 32,100       17,500       111,000 

The  current  rate  of  exchange  on  gold  in  those  years  ranged  from 
2  to  8  per  cent,  premium.     Journal,  L.  C.,  1830,  Appendix  N. 


Practice  of  the  Banks 


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40  The  Canadian  Banking  System,  1817-1890 

Comparing  these  figures  with  the  report  of  aggre 
gate  discounts  on  a  preceding  page,  it  will  be  seen 
that  for  the  Quebec  Bank  the  total  discounts  were 
from  3i  to  4-J  times,  for  the  Bank  of  Montreal  from 
3f  to  5-J  times,  the  debts  due  to  the  banks  respec 
tively  near  January  of  each  year.  As  the  debts  due 
undoubtedly  included  balances  for  which  other  banks 
were  liable,  the  multiples  just  calculated  should  be 
increased  some  what,  justly  to  represent  the  frequency 
with  which  the  banks'  loanable  funds  were  turned 
over.  After  making  this  correction  it  must  be  con 
cluded  that,  on  the  whole,  the  two  banks  which  sur 
vived  had  little  of  their  capital  locked  up  in  overdue 
loans,  and  were  making  their  advances  upon  short- 
time  paper.  Contemporary  evidence  confirms  the 
conclusion.1 

That  the  directors  should  be  familiar  with  mercan 
tile  credit,  the  members  of  the  board  were  generally 
merchants,  and  naturally  they  were  not  precluded 
from  the  advantages  of  bank  credits/  The  statement 

:A  petition  to  the  legislature  of  1829,  attacking  the  Bank  of  Mon 
treal,  complains  of  "its  resolution  not  to  discount  any  bill  for,  or 
make  any  advances  to,  persons  not  directly  engaged  in  trade;  a  rule 
which,  while  it  cuts  the  bank  itself  off  from  a  lucrative  and  secure 
branch  of  trade,  deprives  the  public  of  those  advantages  which  in 
countries  where  the  banking  system  is  better  understood,  are  con 
sidered  as  important  to  the  agricultural,  professional  and  general 
interest  as  to  that  of  the  mercantile  part  of  the  community,  and 
displays  the  narrow,  mistaken  and  selfish  views  of  those  who  can 
not  drop  the  trades  when  they  assume  to  be  bank  directors."  Jour 
nal,  L.  C.,  1829,  p.  354. 

20n  5th  February,  1831,  the  Quebec  Bank  reported  dis 
counts  to  directors  or  money  loaned  or  for  which  they  are 

security  as  promissors £23,002 

Total  liabilities  of  directors  to  the  bank  as  promissors 20,150 

As  endorsers 45,713 

As  security  for  officers 1,270 

Total £67, 133 

Debts  due  to  the  bank  9th  February,  1831 £160,201 


Practice  of  the  Banks  41 

in  the  preceding  note  shows  that  directly  or  indirectly 
the  directors  both  of  the  Quebec  and  Montreal  banks 
were  liable  for  over  a  third  of  the  debts  due  to  each 
respectively  in  the  winter  of  1830-31.  In  1834  the 
proportion  of  directors'  liabilities  to  total  discounts 
was  £47,426  to  £119,051  for  the  Quebec  Bank  and 
£169,121  to  £579,729  for  the  Bank  of  Montreal.1  The 
large  share  which  went  to  satisfy  the  directors'  de 
mand  for  discounts  is  more  easily  justified  when  one 
remembers  the  comparative  wealth  of  these  persons 
and  the  importance  of  their  firms  among  the  com 
mercial  houses  of  the  city.  The  rules  adopted  by 
the  board  to  govern  discounts  were  by  no  means 
careless  or  imprudent.  Discounting  days  were  held 
twice  a  week.  Questions  of  discounting  were  decided 
by  ballot.  No  advances  for  over  £10,000  were 
allowed  by  the  Bank  of  Montreal  without  the  unani 
mous  consent  of  the  board,  and  no  discounts  were 
granted  without  two  responsible  names  on  the  paper 
nor  for  more  than  ninety  days.  Two  votes  in  the 
negative,  or  one  if  there  were  but  five  members  pre 
sent,  sufficed  to  reject  a  note  or  a  proffered  bill  of 
exchange.2 

In  other  respects  the  returns  are  of  use  as  showing 
the  importance  which  deposits  had  already  acquired 
for  the  Lower  Canada  banks,  the  modest  limits 

(Continued  from  page  40.) 

The  Bank  of  Montreal  reported  for  the  16th  November,  1830: 

Discounts  for  Discounts 

Discounts  or              others,  the  Directors  on  Bills  of 

Loans  to  Directors.                 being  liable.  Exchange.            Tota  1 

As  individuals,  £    4,269               £      241  £    4,509 

As  partners . . .     116,204                  53,663  £6,666          176,533 

£181,042 

Total  debts  due  to  the  bank  the  14th  February,  1831 499,001 

Journal  L.  C.,  1831,  Appendix  M. 
1  Journal,  L.  C.,  1834,  Appendix  S. 
2 Journal,  L.  C.,  1829,  Appendix  HIT. 


42  The  Canadian  Banking  System,^  1817-1890 

within  which  the  circulation  was  confined,  and  the 
large  reserves  or  cash  in  hand,  which  the  banks  held 
against  their  demand  liabilities.  The  proportions  of 
cash  to  circulation  and  deposits  were  for  the 

in  1824        1825     1826     1828     1830     1831 

Quebec  Bank 28  per  cent.      25        29        19        25        17 

Montreal  Bank 54     "       "         26        34        29        27 

These  ratios,  though  not  averages,  may  be  presumed 
to  be  fairly  representative.  Their  height  can  be  ac 
counted  for  by  the  situation  of  the  banks,  remote 
from  the  bullion  centers  of  either  America  or  Europe, 
and  the  consequent  necessity  of  a  large  specie  store 
to  provide  against  possible  demands. 

Beginning  with  1825,  there  is  to  be  noticed  a  rapid 
decline  in  the  business  of  the  Bank  of  Canada.  The 
fall  in  its  deposits  from  £11,000  in  1824  to  £295  in 
1825  seems  to  have  decided  the  proprietors  to  wind 
up  the  bank.  It  nowhere  appears  that  the  bank  de 
faulted  in  any  of  its  obligations,  but  the  manage 
ment,  undoubtedly,  entertained  rather  faulty  notions 
as  to  the  privileges  and  duties  of  a  bank.  As  early 
as  1820  they  had  incurred  discredit  by  refusing  to 
pay  in  dollars,  and  offering  to  cash  the  notes  and 
cheques  presented  for  payment  by  the  other  banks  in 
half  crowns,  small  and  much  worn  silver  pieces, 
which,  though  current  at  an  excessive  rating  by  the 
law  of  the  province,  were  not  available  for  export. 
On  the  28th  January,  1820,  the  Bank  of  Montreal  re 
solved  not  to  accept  cheques  upon  the  sister  bank  in 
the  future,  and  in  April  the  directors  passed  a  similar 
resolution  respecting  its  notes.1  It  will  be  observed 
that  the  marked  change  in  the  account  of  the  Bank 
of  Canada  came  in  the  panic  year.  Then  the  capital 
stock,  which  was  £92,82:1  between  1824  and  1826,  was 
reduced  to  £30,025  in  1827,  and  by  1830  to  £3,555. 

Journal,  L.  C.,  1829,  Appendix  HH. 


Practice  of  the  Banks  43 

In  1881  the  liquidator  reported  to  the  House  of  As 
sembly  that  the  bank's  charter  having  expired,  all 
business  was  discontinued.1 

Erratic  ideas  upon  the  duties  and  powers  of  banks 
were  not  confined  to  the  members  of  the  Bank  of 
Canada.  The  merchants  of  Montreal  pray,  in  1830, 
that  if  the  legislature  renew  the  charter  of  the  Mon 
treal  Bank,  "care  should  be  taken  to  protect  the 
interest  of  the  public  by  restricting  the  said  bank 
from  dealing  in  bills  of  exchange,  and  from  issuing 
bills  in  small  sums."2  The  first  item  of  the  complaint 
was  of  long  standing,  having  been  emphasized  in 
1823  by  the  charge  that  when  the  bank  was  buying 
foreign  bills  it  ceased  to  discount.  The  chartered 
bank,  of  course,  was  both  a  powerful  and  an  unwel 
come  competitor  to  the  old  private  dealers  in  ex 
change.  For  the  second  point,  the  legislative  docu 
ments  afford  no  other  proof  than  that  all  the  banks, 
as  they  continued  to  do  until  1870,  issued  circulating 
notes  for  sums  as  low  as  one  dollar  or  five  shillings 
currency. 

A  branch  had  been  established  in  Quebec  by  the 
Bank  of  Montreal  with  an  allotment  of  £30,000  capi 
tal,  and  £60,000  notes  payable  in  that  city.  In  the 
early  years  of  the  decade  the  Quebec  bank  displayed 
considerable  dissatisfaction  with  this  proceeding, 
animated,  apparently,  by  the  belief  that  incorpora 
tion  was  intended  to  establish  at  Quebec  a  local  mon 
opoly  of  banking  for  its  own  benefit.  Some  feeling 
against  the  branch  still  existed  in  1829.  In  a  petition 
of  merchants  and  others  attacking  the  mother  bank 
on  the  general  ground  that  it  had  not  acted  in  the 
public  interest,  there  are  found,  among  other  specific 

'Journal,  L.  C.,  1831,  p.  18. 
^Journal,  L.  C.,  1830,  p.  123. 


44  The  Canadian  Banking  System,  1817-1890 

charges,  the  assertions  that  the  Bank  of  Montreal  had 
no  right  to  establish  a  branch  at  Quebec,  that  it  re 
fused  to  redeem  its  own  notes  at  that  city  when  they 
were  not  stamped  "payable  at  Quebec,"  and  that  the 
Quebec  office  bought  up  at  a  discount  the  notes  issued 
from  Montreal.  This  was  the  same  document  in  which 
was  criticised  the  practice  of  the  bank  to  loan  chiefly 
on  paper  arising  from  commercial  transactions. 

The  charges  were  serious  enough  for  investigation. 
But  the  committee  who  tried  the  case  acquitted  the 
Montreal  Bank  of  the  monstrous  anomaly  of  trading  in 
its  own  notes.  They  found  in  respect  to  the  other 
charges:  (a)  that  the  office  at  Quebec  had  been  highly 
advantageous  to  commercial  and  agricultural  inter 
ests,  particularly  to  those  of  the  city  and  district  of 
Quebec,  having  caused  a  desirable  competition  be 
tween  the  two  moiiied  institutions,  and  that  the  affairs 
of  the  bank  had  been  conducted  on  fair  and  honor 
able  principles;  (6)  the  charter  did  not  prohibit  the 
establishment  of  agencies;  (c)  to  redeem  notes  at  the 
branches  was  not  the  practice  of  the  Bank  of  England, 
the  Bank  of  Scotland,  or  the  Bank  of  the  United 
States;  (d)  the  Quebec  office  had  not  refused  to  redeem 
its  own  issues;  (e)  the  bank  had  not  traded  in  deteri 
orated  coin,  but  had  discountenanced  the  practice  at 
considerable  expense;  (/)  the  bank  had  taken  every 
prudent  measure  to  stop  the  counterfeiting  of  its 
notes. 

§6. FURTHER  LEGISLATION 

The   practical   monopoly    of   issue    was    conferred 

I  upon  the  chartered  banks  by  an  act  of  1830  (10  and 

11  Geo.  IV,  cap.  5,  sec.  ii).     On  penalty  of  forfeiture 

of   the   amount   involved,  it   forbade  that   any   note 

payable  to  bearer  or  under  the  value  of  five   dollars 


Further  Legislation  45 

should  be  offered  or  given  in  payment,  except  such 
notes  as  might  be  issued  by  banks  incorporated  by 
law  in  Lower  Canada. 

In  the  same  year,  the  charter  of  the  Bank  of  Mon 
treal  was  continued  to  the  1st  June,  1837,  and  amended 
in  some  important  respects.     (10  and  11  Geo.  IV,  cap. 
6.)1     (a)  It  had  been  found  expedient  that  more  ex 
plicit  statements  should  be  required.      A  new  form 
was  adopted,   the   changes   being   such   as   to   show 
among  other  items  the  state  of  the  balance  sheet  of 
the  banks  reporting,      (b)  The  total  amount  of  notes 
in  circulation  for  less  than  £1   5s.  ($5)  currency,  was  * 
limited  to  one-fifth  of  the  capital  stock  paid  in,  and 
notes  for  less  than  5s.  were  prohibited.     The  legisla 
ture  reserved  the  power   to   suppress   or   further  to 
limit  the  circulation  of  notes  under  five  dollars,  and 
added  the   penalty   of  forfeiture   of  charter  for  the 
violation  of  either  of  the  restrictions  already  imposed, 
(c)  In  order  to  preserve  a  competition  in  banking,  it 
was  provided  that  the   charter   should   determine  in 
ten   months   from    the  expiry  of   the   charter  of   the 
Quebec  Bank,  unless  that  were  likewise  continued, 
or  some   other   bank   incorporated  in  Lower  Canada. 
The  next  year,  however,  the  Quebec  Bank  secured 
a  renewal  of  its  charter  to  the  1st  May,  1836  (and  by  a 
subsequent  act.  to  the  1st  June,   1837),  with  amend 
ments  similar    to    those    imposed   upon  the   Bank  of 
Montreal.2     (1  Wm.  IV,  cap.  13.)     It   was  permitted 
to  add  to  its  capital  stock  not  more  than  £150,000,  the 
whole  to  be  called  up  within  five  years,  in  instalments 
of  not  less  than  10  per  cent,  per  annum. 

On  the  5th  February,  1831,   a  petition  of  Montreal 
merchants  praying  for   the   incorporation  of    a  new 

Provincial  Statutes  of  Lower  Canada,  1830,  p.  571. 
2 Ibid.,  1831,  p.  102. 


46  The  Canadian  Banking  System,  1817-1890 

bank  in  their  city,  was  presented  to  the  House  of 
Assembly.  There  was  but  one  bank  there,  they  re 
cited,  "  whose  capital  is  altogether  inadequate  to  the 
circulation  of  the  valuable  articles  of  import  and  ex 
port  which  its  geographic  position  naturally  brings 
to  it,  and  which  has  the  effect  of  retarding  the  devel 
opment  of  all  the  commercial  and  agricultural  re 
sources  of  which  it  is  susceptible.  Though  as  yet  no 
improper  influence  may  have  resulted  from  a  banking 
monopoly  in  Montreal,  the  most  effectual  preventive 
of  such  an  evil  is  the  admission  of  reasonable  compe 
tition  with  its  counteracting  influence."1  In  compli 
ance  with  their  prayer  the  legislature  passed  an  act  to 
incorporate  the  president,  directors  and  company  of  the 
City  Bank.  On  the  question  raised  by  this  single 
successful  proposal,  between  1821  and  1841,  to  estab 
lish  a  new  bank  in  Lower  Canada,  twenty-one  French 
members  of  the  Assembly  were  against  the  measure, 
and  a  mixed  party  of  twenty-seven  French  and  Eng 
lish  for  it.2  The  ballot  is  good  confirmation  of  Lord 
Durham's  remarks  upon  the  French  prejudice  against 
banks.3 

1  Journal,  L.C.,  1831,  p.  88. 

2 Ibid,  p.  439. 

3*'The  English  population,  an  immigrant  and  enterprising  popu 
lation,  looked  on  the  North  American  provinces  as  a  vast  field  for 
speculation  and  settlement,  and  in  the  common  spirit  of  the  Anglo- 
Saxon  inhabitants  of  that  continent,  regarded  it  as  the  chief  busi 
ness  of  the  Government  to  promote  by  all  possible  use  of  its  legis 
lative  and  administrative  powers,  the  increase  of  population  and 
the  accumulation  of  property.  They  wished  to  form  themselves 
into  companies  for  the  establishment  of  banks  and  the  construction 
of  railroads  and  canals,  and  to  obtain  the  power  necessary  for  the 
completion  of  such  works  with  funds  of  their  own.  *  *  *  * 
The  applications  for  banks,  railroads  and  canals  were  laid  on  one 
side  until  some  general  measure  could  be  adopted  with  regard  to 
such  undertakings,  but  the  general  measure  thus  promised  was 
never  passed.  In  all  these  decisions  of  the  Assembly,  in  its  discus 
sions  and  in  the  apparent  motives  of  its  conduct,  the  English  popu 
lation  perceived  traces  of  a  desire  to  repress  the  influence  and  suc 
cess  of  their  race."  Report,  ut  tupra,  p.  19. 


Further  Legislation  47 

Before  the  charter  of  the  City  Bank  reached  the 
imperial  government  reforms  had  been  effected  in  the 
English  law  against  forgery.  After  1832  it  was  not 
a  capital  crime,  and  the  charter  from  Lower  Canada 
failed  of  the  royal  assent  because  of  its  severe  and 
inconsistent  penalties  against  forgery.  With  a 
change  in  this  regard  the  bill  was  re-enacted  in  1833, 
to  continue  until  the  1st  June,  1837,  and  became  law 
on  the  3d  May.  (3  Wm.  IV,  cap.  32.) 

The  only  novel  features  in  this  charter  were  the 
provisions  concerning  the  first  organization  of  the 
bank.  Those  who  petitioned  for  incorporation  had 
not  begun  a  banking  business;  indeed,  in  1833  they 
had  still  to  secure  a  capital  in  order  to  meet  the  re 
quirements  of  the*  act.  The  capital  stock  was  lim 
ited  to  £200,000  in  8,000  shares  of  £25  each,  all  of 
which  must  have  been  subscribed  and  £40,000  paid 
in,  and  "  held  by  and  in  the  actual  possession  of  the 
corporation  in  gold  and  silver  coin  current  in  this 
province,"  before  any  note  or  bill  might  be  issued. 
To  raise  the  capital,  subscription  books  were  to  be 
opened  after  a  public  notice  for  four  successive  weeks. 
After  the  amount  was  subscribed,  and  a  notice  pub 
lished  for  three  weeks,  a  meeting  of  the  subscribers 
for  the  election  of  directors  to  serve  until  the  next 
Monday  in  June,  might  be  called.  Five  per  cent,  of 
the  subscription  was  to  be  paid  down  at  the  time  of 
subscribing,  the  remainder  in  instalments  not  greater 
than  10  per  cent,  and  on  thirty  days'  or  more  notice 
from  the  directors,  the  whole  capital  to  be  paid  in 
within  four  years  from  the  passing  of  the  act.  The 
annual  meeting  of  the  shareholders  was  appointed 
for  the  first  Monday  in  June.  At  these  meetings 
were  to  be  elected  the  eleven  directors,  five  or  more 


48  The  Canadian  Banking  System,  1817-1890 

being  annually  re-elected.  In  other  respects  the 
charter  of  the  City  Bank  presents  no  substantial 
difference  to  the  amended  charters  of  the  other  two 
banks. 

The  mention  of  two  more  measures  will  be  neces 
sary  to  complete  the  sketch  of  the  banking  legisla 
tion  in  the  old  province  of  Lower  Canada. 

The  charter  of  the  Bank  of  Montreal  expired  on 
the  1st  June,  1837.  It  was  not  renewed  at  the  time 
because  of  the  failure  of  Parliament  to  act  in  the 
case.  The  bank  continued  its  business1  without  an 
incorporation  until  its  old  charter  was  re-enacted  for 
four  years  by  the  Special  Council,  the  4th  May,  1838. 
The  Quebec  Bank  and  the  City  Bank  met  the  same 
difficulty  by  securing  Royal  Letters  Patent,2  by  which 
their  corporate  existence  was  continued  for  one  year 
after  the  termination  of  the  first  session  of  the  Pro 
vincial  Parliament  that  should  be  held  after  the  31st 
May,  1837. 3  The  conditions  of  these  charters  were 
practically  those  under  which  the  banks  had  acted 
since  1833.  The  years  1837,  1838  and  1839  were 
marked  by  great  disturbances  in  the  Lower  Province 
and  the  suspension  of  the  constitutional  government 
established  in  1792.  In  its  place  was  a  temporary 
government  known  as  the  -'Special  Council  of  the 
Province  of  Lower  Canada."4  This  body  extended 
the  charter  of  the  Quebec  Bank  until  the  1st  Novem 
ber,  1842,  continuing  also  the  royal  permission  to  add 
£150,000  to  its  capital  stock.5  This  is  the  first  of  the 

Ordinances  of  the  Special  Council  of  Lower  Canada,  1838,  p.  50, 
1  Vic.,  cap.  xiv. 

2 7  Wm.  IV,  assented  to  31st  May,  1837. 

3The  Revised  Acts  and  Ordinances  of  Lower  Canada,  1845,  p.  320. 

4Created  by  the  Imperial  Act  of  1  Vic.,  passed  10th  July,  1838. 

5Acts  and  Ordinances,  ut  supra:  "An  ordinance  to  prolong  the 
term  of  the  Royal  Charter  incorporating  the  Quebec  Bank,  and  to 


Further  Legislation  49 

measures  referred  to.  The  second  is  "  an  ordinance 
to  regulate  private  banking  and  the  circulation  of  the 
notes  of  private  bankers,"  i.  e.,  notes  not  of  any  bank 
chartered,  authorized  or  recognized  by  the  legislature 
of  Lower  Canada,  or  competent  authority  in  any 
part  of  Her  Majesty's  dominions,  or  in  the  United 
States.  The  law  forbade  the  unlicensed  private  issue 
of  notes  under  £5  currency,  on  a  penalty  of  three 
times  the  nominal  value  of  the  notes,  or  of  £5  cur 
rency  for  each  offense  if  the  notes  should  be  for  less 
than  five  shillings.  Licenses  were  to  be  granted 
under  the  authority  of  the  ordinance  for  one  year, 
and  published  in  two  newspapers  in  each  of  the  cities 
of  Montreal  and  Quebec.  Licensed  banks  were 
obliged  to  transmit  statements  of  their  affairs  to  the 
government  or  forfeit  their  licenses.  Notes  for  less 
than  $o  were  not  to  exceed  one-fifth  of  the  bank's 
capital.  Severe  penalties  were  also  imposed  for 
giving  or  receiving  in  payment  such  notes  as  were 
denounced  by  the  act. 

From  all  internal  evidence  this  ordinance  was  a 
temporary  expedient  for  the  suppression  of  the  nu- 
erous  irresponsible  issuers  of  promissory  notes  for 
circulation  that  are  wont  to  appear  in  situations  such 
as  then  existed  in  Canada.  The  only  issues  that 
could  have  come  within  the  purview  of  the  ordinance 
were  of  slight  importance.  None  of  the  concerns 
thus  subjected  to  regulation  and  supervision  survived 
until  1841. 

Both  the  ordinances  described  were  products  of  a 
time  of  excitement,  agitation,  disorder  and  violence, 

make  further  provision  for  the  government  and  management  of  the 
said  bank."  2  Vic.  (3),  cap.  xxiv. 


50  The  Canadian  Banking  System,  1817-1890 

succeeded  by  the  rule  of  martial  law.  But  the  Rebel 
lion  of  1837,  the  second  outbreak  of  insurrection  in 
the  following  year,  the  mission  of  the  Earl  of  Dur 
ham  and  the  attempted  solution  of  the  race  and  politi 
cal  problem  by  the  union  of  the  Canadas,  events 
which  absorbed  the  attention  of  the  colonists  between 
1837  and  1840,  cannot  receive  more  than  mention 
here.  The  instability  and  prostration  caused  by  party 
feuds,  by  civil  war,  military  rule  and  constitutional 
change,  involve  for  the  commerce  and  banking  of  a 
country  consequences  which,  though  overshadowed 
by  political  events,  are  often  costly  and  significant. 
But  any  such  results  experienced  in  Lower  Canada, 
the  effects  of  the  financial  crisis  of  1837,  and  the 
suspension  of  specie  payments  induced  by  the  com 
mercial  and  political  confusion,  can  best  be  discussed 
in  connection  with  the  similar  difficulties  encountered 
in  the  same  years  by  the  banks  of  the  Upper  Province. 
Before  taking  up  the  early  banking  in  Upper  Can 
ada  it  is  necessary  to  notice  the  appearance  in  Mon 
treal  of  a  bank  which  has  ever  since  retained  the 
unique  characteristics  of  its  constitution.  The  French 
banking  firm  of  Viger,  De  Witt  et  Cie.,  otherwise 
known  as  La  Banque  du  Peuple,  began  its  business  in 
1835.  It  was  a  co-partnership  in  commendam  or  en 
commandite,  composed  of  some  twelve  principal  part 
ners  or  members  and  an  indefinite  number  of  com- 
manditaires  or  partners  in  commendam.  Of  the  prin 
cipal  partners  was  required  a  considerable  contribu 
tion  of  capital  in  each  case;  in  them  exclusively  was 
vested  the  management  of  the  bank,  and  against 
them  ran  a  joint  and  several  liability  for  all  the  debts 
of  the  bank.  The  commanditaires  had  no  voice  in 


Further  Legislation  51 

the  management  of  the  bank,  were  exempt  from  any 
liability  beyond  the  amount  of  their  subscribed  stock, 
and  were  entitled  to  dividends  on  their  contributions 
of  paid-in  capital  at  the  same  rate  as  the  principal 
partners.  Concerning  this  bank  Lord  Durham  re 
marked:  "The  establishment  of  the  Banque  du 
Peuple  by  French  capitalists  is  an  event  which  may 
be  regarded  as  a  satisfactory  indication  of  an 
awakening  commercial  energy  among  the  French, 
and  it  is,  therefore,  very  much  to  be  regretted  that 
the  success  of  the  new  enterprise  was  uniformly  pro 
moted  by  direct  and  illiberal  appeals  to  the  national 
feelings  of  the  race."1 

Statements  of  the  chartered  banks  of  Lower  Can 
ada  are  appended  for  1831  and  1834,  the  last  state 
ment  published  before  the  rebellion  that  I  have  been 
able  to  procure. 

Report,  ut  supra,  p.  15. 


The  Canadian  Banking  System,  1817-1890 


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P 


CHAPTER  III 
UPPER   CANADA,  1817-1839 

§7. ESTABLISHMENT  OF  THE  BANK  OF  UPPER  CANADA 

THE  question  of  incorporating  a  bank  first  came 
before  the  House  of  Assembly  of  Upper  Canada  in 
1817,  the  same  year,  in  fact,  as  the  matter  was 
broached  to  the  legislature  of  the  Lower  Province. 
On  the  5th  March,  the  "Memorial  of  the  merchants  and 
others  of  the  town  of  Kingston"  was  presented.  It 
showed  that  the  "memorialists,  having  taken  into 
consideration  the  great  utility  and  advantage  of 
banks  to  a  commercial  people,  which  has  been  evinced 
by  the  number  which  have  been  established  in  Eng 
land  and  the  United  States  of  America  since  the 
Revolutionary  War,  and  feeling  the  benefit  which  the 
latter  derive  from  the  ready  aid  afforded  them  by 
their  banks  to  carry  on  their  establishments  and  im 
provements  in  their  western  territory,  which,  although 
of  a  more  recent  date,  is  in  a  more  flourishing  state 
than  any  part  of  this  province,  are  of  opinion  that  if 
found  so  beneficial  in  those  countries  they  cannot 
fail  of  tending  to  the  prosperity  of  this  province. 
The  want  of  such  an  establishment  was  severely  felt 
before  the  late  war,  and  there  is  hardly  any  doubt 
but  that  the  same  inconveniences  will  very  shortly 
occur,  whereas  a  well  regulated  bank  would  obviate 
all  these  difficulties  by  keeping  up  a  circulating  paper 


54  The  Canadian  Banking  System,  1817-1890 

to  meet  every  public  demand."  They  prayed,  there 
fore,  for  incorporation  as  the  Bank  of  Upper  Canada, 
with  a  capital  of  £100,000. l 

The  act  of  incorporation  passed  by  the  Assembly 
and  Legislative  Council  was  reserved  by  the  Lieuten 
ant-Go  vernor  for  the  signification  of  the  royal  pleasure. 
Assent  was  granted,  but  as  notice  of  it  arrived  too 
late  for  promulgation  within  the  period  established 
by  the  charter  for  the  bank  to  begin  business,  a  re- 
enactment  was  necessary  to  make  the  charter  avail 
able.2  The  inhabitants  of  Kingston  again  petitioned 
in  June,  1819.  On  the  12th  July  an  "Act  to  incorporate 
sundry  persons  under  the  style  and  title  of  the  Presi 
dent,  Directors  and  Company  of  the  Bank  of  King 
ston"  became  law  (59  Geo.  Ill,  cap.  15,  U.  C.).  This 
charter  was  forfeited  by  non-user  till  the  1st  January, 
1821.  The  reason  of  so  extended  a  reference  will 
presently  appear. 

In  the  meantime  merchants  and  residents  of  the 
Home  District  (the  site  of  the  present  city  of  Toronto) 
prayed  for  incorporation  as  the  Upper  Canada  Bank 
ing  Company.  They  supported  their  request  by  ref 
erence  to  the  want  of  a  circulating  medium  before  the 
Army  Bills  were  issued,  and  to  the  prospect  of  a  like 
disadvantage  soon  becoming  oppressive.  The  char 
ter  passed  for  their  benefit  was  reserved  for  the  royal 
pleasure  by  Sir  Peregrine  Maitland,  12th  July,  1819. :5 
As  before,  the  receipt  of  the  royal  assent  was  much 

Journal  of  the  House  of  Assembly  of  the  Province  uof  Upper 
Canada,  1817,  p.  106,  of  the  MS.  copy  in  the  Library  of  Parliament, 
Ottawa,  Canada. 

2,Tournal,  U.  C.,  ut  supra,  1819,  p.  19. 

3 Ibid,  p.  419. 


Establishment  of  the  Bank  of  Upper  Canada  55 

delayed,  and   on   the   5th   April,  1821,  the   House  of 
Assembly  adopted  the  following  resolutions: 

"1.  Resolved,  That  it  is  the  opinion  of  this  House  that  the  estab 
lishment  of  a  Provincial  bank,  under  proper  restrictions,  would  be 
beneficial  to  the  country,  by  remedying  the  great  want  of  specie  by 
securing  to  ourselves  whatever  advantages  are  to  be  derived  from 
the  issue  of  a  paper  currency,  and  by  establishing  a  circulating  me 
dium  of  known  security,  instead  of  the  paper  of  private  banks,  un 
controlled  by  any  charter  or  legislative  provision,  and  which,  from 
being  rejected  by  the  Public  Receivers,  does  not  answer  effectually 
all  the  purposes  of  trade. 

"  2.  Resolved,  That  it  is  the  opinion  of  this  House  that  a  Bill 
should  be  brought  in  for  establishing  a  Provincial  bank  by  the  in 
corporation  of  such  persons  as  shall  become  stockholders  under  the 
provisions  of  the  Act;  the  system  to  be  as  similar  as  circumstances 
will  permit  to  that  contained  in  the  Bill  formerly  passed  for  estab 
lishing  a  bank  at  Kingston,  except  that  to  insure  its  going  into  ope 
ration,  the  amount  of  stock  and  deposit,  and  consequently  of  paper 
to  be  issued,  should  be  reduced."1 

But  the  act  to  incorporate  the  Bank  of  Upper  Can 
ada  became  law  by  the  proclamation  of  the  royal 
assent  on  the  21st  April,  1821,  and  a  new  act  became 
unnecessary.  (59  Geo.  Ill,  cap  24,  U.  C.)2 

From  the  foregoing  it  can  be  seen  with  what  force, 
greater  even  than  in  Lower  Canada,  the  need  of  a 
reform  in  the  currency  prompted  the  establishment  of 
the  first  bank  in  the  Upper  Province.  In  the  moving 
cause  of  its  origin  this  institution  differed  little  from 
the  old  banks  of  Amsterdam,  Hamburg  and  Italian 
cities,  the  effort  to  escape  the  evils  of  a  varied  and 
fluctuating  circulating  medium  being  of  chief  import 
ance  in  each  of  these  undertakings.  In  Upper  Can 
ada  there  was  also  the  need  of  an  instrument  of  ex 
change  less  costly  than  specie,  and  a  hope,  by  the 

:Journal  of  the  House  of  Assembly  of  the  Province  of  Upper 
Canada,  Kingston,  U.  C.,  1821,  p.  190. 

-Revised  Statutes  of  the  Province  of  Upper  Canada,  Kingston, 
1821,  p.  202. 


56  The  Canadian  Banking  System,  1817-1890 

introduction  of  credit  organization  in  some  form,  to 
promote  the  prosperity  and  advantage  of  commerce 
and  agriculture.  This  purpose,  apparently  so  dear  to 
provincial  assemblies,  was  suggested  as  much  by  the 
example  of  the  United~State.s  as  by  that  of  the  mother 
country.  Of  the  instances  of  American  influence  that 
we  shall  have  to  note,  this  is  by  no  means  the  last. 

But  in  its  constitution,  and  in  the  charter  restric 
tions  under  which  it  was  to  act,  the  Bank  of  Upper 
Canada  presents  few  remarkable  variations  from  the 
Lower  Canada  banks  incorporated  in  1821.  The  first 
five  sections  of  the  act  are  chiefly  concerned  with 
provision  for  the  conduct  of  subscription  to  the 
bank's  capital.  The  limit  set  in  1821  was  £200,000, 
divided  into  shares  of  £12  10s.,  of  which  £50,000  were 
to  be  subscribed  and  £20,000  in  specie  to  be  paid  in 
before  the  bank  should  begin  business.  On  account 
of  the  scarcity  of  coin,  the  requirement  of  specie  pay 
ment  was  reduced  in  1822  to  £10,000.  (2  Geo.  IV, 
cap.  7,  U.  C.)  In  1823  the  capital  limit  had  been 
found  greater  than  the  circumstances  and  commerce 
of  the  province  required.  At  the  request  of  the  bank 
it  was  reduced  to  £100,000  and  "the  whole  amount 
of  the  property,  stock  and  estate"  of  the  bank  limi 
ted  to  £100,000.  The  latter  is  a  curious  provision, 
whose  only  effects  must  have  been  to  prevent  the  in 
crease  of  capital  and  the  accumulation  of  a  reserve 
fund  or  rest  out  of  profits. 

The  important  differences,  in  effect,  from  the  Lower 
Canada  charter  we  have  described,  will  be  found  in 
the  following  details: 

(a)  The  bank  was  to  be  established  at  the  seat  of 
government  of  the  province,  with  express  authority, 
however,  to  establish  branches. 


Establishment  of  the  Bank  of  Upper  Canada  57 

(b)  Notes  under  five  shillings  were  forbidden. 

(c)  Four  of  the  fifteen  directors  were  each    year 
ineligible  for  re-election. 

(d)  Directors    absent    when    the   transaction    was 
authorized  could  avoid  the  personal  liability  for  the 
excess  of  debts  of  the  bank  over  thrice  the   paid-in 
capital  stock,  plus  deposits  of  money,  by  immediate 
notice  to  the  stockholders  in  general  meeting,  instead 
of  by  published  newspaper  notice. 

(e)  The  bank  could  lawfully  hold  only  such  real 
estate  as  was  necessary  for  the  convenient  transac 
tion  of  its  business,  but  no  limit  was  imposed  on  the 
annual  value  of  such  property.     The  provisions  as  to 
land  mortgaged  to  the  bank  by  way  of  additional 
security,  etc.,  present  no  variations. 

(/)  On  refusing  payment  of  its  bills  in  specie,  the 
bank  was  obliged  to  cease  banking  operations,  on 
pain  of  forfeiting  its  charter,  until  specie  payment 
should  be  resumed. 

(g)  An  annual  return,  properly  sworn  to,  was  to  be 
made  to  the  provincial  legislature. 

The  charter  was  to  remain  in  force  until  the  1st 
June,  1848. 

The  new  bank  began  its  business  on  the  1st  July, 
1822.  The  chronic  scarcity  of  specie  in  the  province 
and  the  government's  power  to  subscribe  for  stock 
have  lent  color  to  the  story  of  an  unauthorized 
advance  of  coin  from  the  military  chest,  without 
which  the  bank  would  have  been  unable  to  start.1 
But  the  evidence  for  this  has  mot  yet  been  advanced. 
The  government  did  subscribe  for  the  2,000  shares  / 
allotted  to  it  by  the  charter.  When  the  required 

lVide  George  Hague,  "The  Banking  System  of  Canada,"  in 
"Canadian  Economics,"  Montreal,  1885,  p.  226. 


7FI7ERSIT7 


58  The  Canadian  Banking  System,  1817-1890 

capital  was  reduced  in  1823,  the  government,  thus 
becoming  the  owner  of  a  fourth  of  the  entire  stock, 
was  authorized  to  appoint  four  of  the  fifteen  directors 
"for  the  better  security  of  the  public  interest."1  Thus 
situate  by  law  at  the  seat  of  government  and  with 
the  government  entitled  to  share  in  its  management 
as  well  as  its  profits,  the  Bank  of  Upper  Canada 
became  both  in  law  and  in  fact  a  ''Provincial  Bank." 
A  practical  monopoly  of  note  issue  was  conferred 
upon  it  in  1823  by  an  act  prohibiting  banks  not  re 
deeming  their  notes  in  specie  within  the  province 
from  carrying  on  business  there.  (4  Geo.  IV,  cap. 
18.) 


§8. — THE  "PRETENDED"  BANK  OF  UPPER  CANADA  AT 

KINGSTON 

It  will  be  remembered  that  difficulty  in  securing 
the  required  capital  caused  the  charter  of  the  Bank 
of  Kingston  to  be  forfeited  for  non-user.  Neverthe 
less  some  ten  residents  of  Kingston  clubbed  together 
in  1819,  formed  an  association  in  direct  violation  of 
the  law,  invited  persons  to  subscribe  to  the  stock, 
and  opened  an  office  in  Kingston  as  the  President, 
Directors  and  Company  of  the  Bank  of  Upper  Canada.2 
Their  own  subscriptions  they  paid  chiefly  in  stock 
notes,  but  in  one  way  and  another  a  paid-up  capital 
of  about  £12,000  was  secured.3  By  1823  the  pretended 
bank  had  issued  notes  for  £18,997  14s.  3d'.,  and  by 
means  of  these  or  of  its  stock,  had  become  the  debtor 
of  a  great  portion  of  the  inhabitants  of  the  province. 

!4  Geo.  IV,  cap.  xi. 

24  Geo.  IV,  cap.  xxiii,  Preamble. 

3 Journal,  U.  C.,  1825,  Appendix  B. 


The  "Pretended"  Bank  of  Upper  Canada  59 

If  rightly  conducted,  the  enterprise  might  have 
been  profitable,  but  the  management  had  neither 
honor  nor  honesty.  They  soon  attempted  to  loot  the 
bank.  Two  directors  alone  borrowed  a  sum  equal  to 
the  paid-in  capital.  Later,  the  president  and  a  con 
federate  on  the  board  of  directors  opened  a  '-shaving 
shop"  for  lending  the  bank's  funds  to  individuals  at 
double  interest.  This  aroused  the  jealousy  of  the 
other  directors,  and  Whitney,  the  president,  was  sus 
pended  in  August,  1822.  £8,000  of  redeemed  notes 
were  lying  with  the  Montreal  agent  of  the  bank. 
Whitney  forthwith  left  for  Montreal  and  arrived  be 
fore  the  news  of  the  trouble  was  come  by  post  from 
Kingston.  He  asked  the  cashier  of  the  Bank  of 
Canada  for  the  parcel  of  notes  and  received  it,  to 
return  to  the  Kingston  bank's  cashier.  Whitney 
used  the  notes  for  his  own  purposes.  When  the 
quarrel,  the  abstraction  of  over  £1,000  from  the 
parcel,  and  the  refusal  of  Whitney  to  give  up  the 
remaining  notes  became  known  in  Kingston,  a  run 
upon  the  bank  was  started.  Its  small  store  of  specie 
was  soon  exhausted.  Ignorance  only  added  to  the 
popular  alarm  and  intensified  the  demands  for  pay 
ment.  Note-kiting  or  reciprocity  in  indorsement  had 
been  practiced  freely  by  the  directors,  and  renewals 
granted  without  discretion.  The  locked-up  funds 
could  not  be  realized  upon.  About  the  23d  Septem 
ber,  1822,  the  bank  failed.1 

Journal,  Legislative  Council,  U.  C.,  1823,  p.  113;  also  Journal, 
U.  C.,  1823,  pp.  187-201,  of  the  type-written  copies  in  the  Legisla 
tive  Library,  Toronto;  also  "Statement  of  the  affairs  of  the  Bank  of 
Upper  Canada,  at  Kingston,  taken  from  authentic  documents," 
Kingston,  1840,  pp.  138  et  seq. 


60  The  Canadian  Banking  System,  1817-1890 

The  condition  of  the  debts  and  property  on  the  6th 
February,  1823,  was  as  follows: 

Stock  paid  in: 

Directors £3,240 

Others 7.896 

£11,136 

Notes  unredeemed 18,176 

Deposits 900 

£30,212 

Less  directors'  stock 3,240 

Amount  to  be  paid £26,970 

Debts  due  to  the  bank  by  bond  and  note £22,227 

Book  debts 1 ,000 

Deficiency  to  be  made  up  by  the  cashier 5,884 

Total  assets £29,111 

Instead  of  enabling  the  shareholders  to  enforce 
debts  due  to  the  bank  and  thus  to  wind  up  the  con 
cern,  the  legislature,  in  1823,  vested  the  stock,  debts, 
bonds  and  property  of  the  bank  in  the  hands  of  com 
missioners  for  the  benefit  of  the  creditors.  (4  Geo.  IV, 
cap.  22.)  The  commissioners  reported  claims  existing 
against  the  bank  the  3d  January,  1825,  as  £26,698, 
of  which  £11,136  were  for  stock.  The  assets  amounted 
to  £18,718.  There  was  a  possibility  (not,  however, 
realized)  of  recovering  from  the  sureties  for  the  bank 
officials  the  £5,884  considered  as  an  abstraction  from 
its  funds.1  In  the  opinion  of  the  commissioners  the 
whole  capital  would  be  sunk,  and  even  then  all  claims 
would  not  be  satisfied.  Their  forecast  was  correct. 
The  legislature  tried  to  remedy  the  defects  of  the  first 
act  by  measures  passed  in  1824,  1828,  1829  and  1836. 
Liquidation  dragged  along,  the  commissioners  made 
mistakes,  by  one  of  them  losing  a  suit  in  which  a 

11  'A  statement  of  the  affairs  of  the  late  pretended  Bank  of  Upper 
Canada,  at  Kingston,"  York,  1827,  p.  168  et  seq. 


Economic  and  Political  Environment  of  the  Bank       61 

claim  for  £10,000  was  involved,  and  by  the  arbitra 
tion  which  debtors  might  demand  under  the  law  of 
1829,  many  claims  were  reduced  to  less  than  a  fifth 
of  their  original  amount.1  But  in  1839  the  legal  debts 
due  from  the  former  bank  had  been  reduced,  by 
payment  or  scaling  down,  to  less  than  £5.000,  and 
after  an  unimportant  act  of  1841,  the  matter  remained 
untouched  by  legislation  (4  and  5  Vic.,  cap.  29,  Can.) 
This  first  bank  failure  in  Canada,  though  compara 
tively  small  amounts  were  involved,  caused  wide 
spread  loss.  Much  grievous  injury  was  inflicted  by 
the  extreme  delay  in  liquidation.  The  better  provi 
sion  was  made  for  the  notes  issued  by  the  bank, 
£11,500  having  been  retired  in  various  ways  by  1825. 2 
As  the  worst  sufferers  were  the  dupes  whose  money 
had  been  secured  for  stock  and  then  manipulated  by 
the  directors,  that  extreme  suspicion  of  banks  of  issue 
which  frauds  upon  their  paper  currency  made  well- 
nigh  universal  among  Americans,  was  not  excited 
in  the  minds  of  Canadians.  Thus  they  were  left 
free  to  consider  more  fairly  the  general  question  of 
banks  and  bank  regulation,  a  fact  not  without  its 
importance  in  the  subsequent  history. 


§9. ECONOMIC      AND      POLITICAL      ENVIRONMENT      OF 

THE    BANK 

The  economic  conditions  in  which  banking  began 
in  Upper  Canada  receive  some  notice  in  the  petitions 
for  incorporation.  In  prosperity  and  development, 
e.  g.,  the  western  territory  of  the  United  States  is  said 

:"A  statement  of  the  affairs  of  the  late  pretended  Bank  of  Upper 
Canada,  at  Kingston,"  York,  1827,  p.  2. 
2Journal,  U.  C.,  1825,  Appendix  B. 


62  The  Canadian  Banking  System,  1817-1890 

to  be  further  advanced  than  the  Canadian  province, 
yet  surely  no  one  in  1818  could  claim  much  in  these  re 
spects  for  Indiana  and  Illinois,  or  Michigan  and  Ohio. 
Twenty  years  later,  Lord  Durham,  reviewing  the  his 
tory  of  the  province,  said  with  reference  to  the  geo 
graphical  character  of  the  country:  "Its  inhabitants 
scattered  along  an  extensive  frontier,  with  very  im 
perfect  means  of  communication  and  a  limited  and 
partial  commerce,  have  apparently  no  community  of 
interest  or  opinion."  The  province  had  no  great  cen 
ter  with  which  all  the  separate  parts  were  connected, 
nor  was  there  an  habitual  intercourse  between  the 
inhabitants  of  different  sections.  Deep  seated  im 
pediments  blocked  the  way  of  industrial  progress. 
"A  very  considerable  portion  of  the  Province  has 
neither  roads,  post  offices,  mills,  schools  or  churches. 
The  people  may  raise  enough  for  their  own  subsist 
ence,"  the  Report  continues,  "and  may  even  have  a 
rude  and  comfortless  plenty,  but  they  can  seldom  ac 
quire  wealth."1 

After  the  depression  of  1825  and  1826  in  England, 
the  population  was  suddenly  doubled  by  immigration. 
The  value  of  all  species  of  property  rose  and  the  re 
sources  of  the  province  were  rapidly,  and  for  the  old 
inhabitants  profitably  developed.2  A  series  of  canals, 
designed  to  render  navigable  the  whole  course  of  the 
St.  Lawrence,  was  begun  in  1825,  the  colony  contrib 
uting  lavishly  by  subsidies  and  expenditures  on  its 
own  account.  The  Welland  canal  was  completed  and 
the  Cornwall  canal  far  advanced.  But  the  utility  of  the 
works  was  diminished  and  almost  annihilated  by  the 
failure  of  the  Lower  Province  to  assist  by  the  con- 

1Lord  Durham's  Report,  p.  70. 
2  Ibid,  p.  59. 


Economic  and  Political  Environment  of  the  Bank       63 

struction  of  such  part  of  the  projected  system  as  lay 
within  its  borders.  Upper  Canada  incurred  in  the 
fifteen  years  following  1825  a  debt  of  nearly  a  million 
pounds  sterling.  Such  an  expenditure,  added  to  the 
other  capital  invested  in  the  various  undertakings, 
had  a  powerful  effect  on  the  market  for  labor  and  for 
goods.  But  the  only  ports  of  entry  for  Upper  Canada 
were  in  the  Lower  Province.  Navigation  on  the  St. 
Lawrence  opened  several  weeks  later  than  goods 
could  be  obtained  through  the  United  States,  if  the 
use  of  New  York  as  a  port  of  entry  had  been  allowed. 
Merchants,  therefore,  were  obliged  to  submit  to  inju 
rious  delays  in  their  business,  or,  by  importing  in  the 
autumn,  have  their  capital  lying  dead  for  six  months. 
The  mischief  was  aggravated  by  a  monopoly  of  freight 
forwarding  existing  between  the  river  St.  Lawrence 
and  the  Rideau  canal.1 

The  imperial  regulations  with  respect  to  trade  were 
another  impediment ;  goods  that  the  colony  most  needed 
were  heavily  taxed,  while  the  staples  of  the  United 
States,  the  same  as  its  own  products,  were  duty  free. 
The  more  settled  districts  had  the  stronger  represen 
tation  in  the  Assembly,  and  it  is  said  that  members, 
in  disposing  of  the  funds  voted  for  roads  and  like  im 
provements,  were  chiefly  intent  by  this  means  to 
strengthen  their  influence  with  their  constituents. 
The  waste  lands  of  the  province  had  been  cut  up  and 
close  settlement  obstructed  by  the  reservation,  due  to 
Mr.  Pitt,  of  an  eighth  of  every  grant  "for  the  sup 
port  of  a  Protestant  clergy."2  Many  of  the  best 
tracts,  lying  on  the  natural  lines  of  settlement,  were 
refused  by  the  authorities  to  intending  purchasers 

xLord  Durham's  Report,  p.  71. 

2Gold\vin  Smith,  "Canada  and  the  Canadian  Question,"  p.  112. 


64  The  Canadian  Banking  System,  1817-1890 

and  given  over  to  a  land  jobbing  company  which 
held  them  waste  while  speculating  for  a  rise.1  Politics 
in  the  province  were  violent  and  bitter,  the  struggle 
of  a  Reform  party  against  the  Conservatives.  At  the 
center  and  head  of  the  Conservatives  was  the  "Family 
Compact,"  a  junto  armed  with  official  patronage  and 
influence,  strengthened  by  the  control  of  the  crown 
lands,  and  intrenched  in  church,  bar,  bench  and  gov 
ernment.2  Furthermore,  the  revenues  of  the  prov 
ince  were  deficient,  scarcely  meeting  the  interest  on 
the  public  debt.  Work  upon  the  canals  eventually 
lagged  for  want  of  the  funds,  and  the  means  of  in 
ternal  improvement  became  available  only  by  a  sys 
tem  of  special  assessments.3 

In  the  political  struggle,  the  Bank  of  Upper  Canada 
cast  its  lot  with  the  government  and  the  Family 
Compact.  It  had  the  custody  of  the  moneys  of  the 
provincial  treasury;  it  was  the  depository  of  the 
Welland  Canal  Company.  It  was  accused  of  dis 
tributing  its  patronage  according  to  the  partisan 
activity,  rather  than  the  business  ability,  of  candi 
dates  for  position,  and  of  discriminating,  when  it 
granted  credit,  in  favor  of  the  dominant  party.4 
There  is  reason  to  believe  that,  though  preferred  by 
a  partisan  committee,  these  charges  contained  a  large 
measure  of  truth.5  The  shareholders  of  the  bank 

1  Journal,  U.  C.,  1835,  Appendix,  vol.  i,  First  report  of  the  Select 
Committee  on  Trade  and  Commerce. 

2 Lord  Durham's  Report,  p.  56. 

*lbid,  p.  58. 

4 Journal,  U.  C.,  1835,  vol.  i,  p.  82,  Seventh  Report  of  the  Com 
mittee  on  Grievances,  Appendix  xi. 

5A  select  committee  on  the  subject  of  banking,  quite  as  partisan, 
but  on  the  other  side,  declared,  however,  in  1834,  that  "there  was 
never  the  slightest  foundation  for  the  insinuation  that  the  Bank  of 
Upper  Canada  was  a  dangerous  engine  in  the  hands  of  the  Govern- 


A  Period  of  Expansion,  1830-37  65 

were,  to  a  great  extent,  members  of  the  compact. 
The  bank  thus  had  some  influence  upon  legislation. 
In  1830  and  1831,  the  Legislative  Council  rejected  a 
bill  proposing  to  incorporate  a  competitor  to  the 
bank.  And  again,  in  1833,  it  rejected  two  charters 
passed  by  the  Assembly.1 


§10. A    PERIOD    OF    EXPANSION,    1830-37 

Some  indications  of  a  change  in  the  Upper  Canada 
conditions  have  been  given  in  the  remarks  designed 
to  supply  an  idea,  necessarily  inadequate,  of  the 
economic  situation  in  which  the  bank  first  carried  on 
its  business.  In  1830  and  1831  the  prosperity  of  the 
province  was  -appreciably  enhanced.2  Towards  this, 
without  doubt,  the  immigration  of  1826  and  1827 
had  contributed,  as  well  as  the  expenditures  on  pub 
lic  works  and  the  stimulus  to  trade  and  industry 
which  they  afforded.  But  the  rise  of  land  values, 
the  more  active  operations  in  real  estate,  the  unwonted 
readiness  to  engage  in  other  transactions,  and  the 
intense  demand  for  capital  to  assist  the  extension  of 
trade  and  agriculture,  point  to  the  conclusion  that 
the  change  in  Canada  was,  to  no  slight  extent,  a  part 
of  the  upward  movement  then  affecting  the  whole 
North  American  continent. 

One  effect  of  the  new  prosperity  was  the  creation 
of  more  banking  capital.  The  process  was  furthered 
by  borrowers  for  the  increased  facility  in  obtaining 
loans  at  the  legal  rate  of  interest,  by  investors  for 

ment,  against  either  the  Bank  or  the  Government."  Journal,  U.  0., 
1833-34,  Appendix,  p.  166.  But  cf.  Lord  Durham's  Report,  p.  56. 

Journal,  U.  C.,  1835,  ut  supra,  p.  2. 

2 Journal,  U.  C.,  1833-34,  Appendix,  p.  162,  Testimony  of  Benj. 
Thome. 


66 


The  Canadian  Banking  System,  1817-1890 


the  large  dividends  derived  from  bank  shares.  The 
paid-in  capital  of  the  Bank  of  Upper  Canada,  reported 
at  the  modest  sum  of  £10,640  in  1823,  had  risen  to 
£54,037  in  1826  and  £100,000  in  1830.  At  various 
dates  the  bank  reported  to  the  legislature  as  follows  : 


Dec.  15,i 
1826 

Feb.  2,2 

1828 

March  3,3 

1829 

Feb.  2.4 

1830 

Jan.  1,5 

1831 

£ 

<£ 

£ 

£ 

£ 

Funds                               I 
and  prop6rty           .  •  C 

38,391 

36,765 

47,271 

26,412 
6  571 

15,618 
fi  715 

Capital  stock  paid  in  

54,039 

72,067 

72,410 

77,462 

100,000 

Debts  due  to  the  bank.  . 

107,598 

171,869 

180,854 

214,045 

260,557 

Debts  due  by  the  bank.  . 

19,484 

32,376 

35,102 

38,303 

33,621 

Bank  notes  in  circulat'n 

87,339 

122,858 

140,488 

156,296 

187,039 

Specie  in  vault  

19,066 

21,177 

23,190 

33,134 

42,664 

It  had  paid  regular  dividends  at  8  per  cent,  per 
annum,  amounting  at  the  close  of  1831  to  £41,669, 
and  two  bonuses  of  6  per  cent.  In  all  it  had  dis 
tributed  some  £51,000  to  its  shareholders.6  In  the 
session  of  1831-32  the  legislature  authorized  the  ad 
dition  of  £100,000  to  its  capital  in  shares  of  £12  10s. 
each,  and  by  the  same  act  forbade  the  bank  to  loan 
on  its  own  stock  on  pain  of  forfeiting  its  charter. 
(2  Wm.  IV,  cap.  10.)  An  act  incorporating  the  Com 
mercial  Bank  of  the  Midland  District,  rejected  by 
the  Legislative  Council  the  two  preceding  years,  was 
passed  in  the  same  session.  The  principal  office  of 
the  Commercial  Bank  was  to  be  at  Kingston,  its  cap 
ital  stock  £100,000.  Returns  were  henceforth  required 
of  both  the  banks  in  somewhat  greater  detail,  and  in 

1  Journal,  U.  C.,  1826-7.  p.  13. 
2Journal,  U.  C.,  1828,  p.  61. 
:i Journal,  U.  C.,  1829,  p.  67. 
x4  Journal,  U.  C.,  1830,  p.  — . 
5Journal,  U.  C.,  1831,  p.  31. 

6 Journal  of  the  Legislative  Assembly  of  the  Province  of  Canada, 
1841;  Appendix  0. 


Imperial  Regulation  of  Colonial  Bank  Charters         67 

the  form  of  balance  sheets.  Save  in  this  important 
respect  the  new  and  amended  charter  presented  no 
essential  differences  from  the  old  one. 

When  books  were  opened  to  receive  subscriptions 
to  the  new  and  additional  capital  thus  authorized, 
the  public  displayed  the  utmost  eagerness  to  obtain 
shares.  The  demand  is  the  less  surprising  when  one 
recalls  the  high  profits  paid  by  the  Bank  of  Upper 
Canada  without  the  assistance  of  a  rest  or  reserve 
fund.  The  books  for  subscription  to  its  8,000  shares 
of  additional  stock  were  closed  after  a  single  day  at 
York,  the  head  office,  and  as  soon  as  the  mail  could 
reach  the  other  offices.  No  person  was  permitted,  in 
the  first  instance,  to  subscribe  for  more  than  eighty 
shares.  Yet  in  so  short  a  time  subscriptions  were 
received  for  25,679  shares,  or  £320,987  10s.1  In  1832 
it  was  able  to  pay  out  of  the  premium  on  the  new 
stock  a  bonus  of  18  per  cent,  to  the  holders  of  the 
original  shares,  and  still  earn  its  regular  dividend  of 
8  per  cent.2  So  far  as  the  anxiety  of  the  public  to 
secure  stock  was  concerned,  the  experience  of  the 
Commercial  Bank  was  precisely  the  same. 


§11. IMPERIAL      REGULATION      OF      COLONIAL      BANK 

CHARTERS 

In  August,  1833,  after  both  banks  had  been  opera 
ting  under  the  acts  of  1832  for  over  a  year,  rumors 
of  a  royal  disallowance  of  the  acts  became  current. 
The  banks  then  had,  in  all,  fifteen  or  sixteen  offices 
and  agencies,  had  discounted  paper  to  the  amount  of 

1  Journal,  U.  C.,  1833-34,  Appendix,    p.    162  et  seq.,  Report  of  the 
Select  Committee  on  the  Subject  of  Banking. 
2Journal,  Canada,  1841,  Appendix  0. 


68  The  Canadian  Banking  System,  1817-1890 

£450,000,  and  issued  some  £300,000  of  notes.  A 
temporary  panic  was  the  result  of  the  rumor,  for 
debtors  of  the  banks  greatly  feared  the  withdrawal 
of  their  credits.  In  some  places  mass  meetings  pro 
tested  against  a  disallowance,  and  petitions  to  the 
King  were  drawn  up.  In  several  instances  small 
runs  were  started.  The  banks  ceased  discounting 
for  a  time,  but  soon  began  again.  Thus,  in  the  lan 
guage  of  the  day,  they  restored  mercantile  confi 
dence  and  saved  many  from  bankruptcy.1 

The  Committee  of  the  Privy  Council  for  Trade  had 
adopted  in  1830  a  series  of  regulations  applying  to 
colonial  bank  charters  and  devised  for  the  protection 
of  the  public  interests.  They  were,  it  was  said,  "pre 
cautions  rendered  more  necessary  by  an  experience 
of  the  prejudicial  effects  which  have,  in  former 
periods,  resulted  from  the  extension  of  the  banking 
system  in  the  neighboring  states  without  the  restric 
tions  they  impose."2  The  regulations  were  trans 
mitted  by  the  British  Colonial  Office  in  Downing 
street,  with  instructions  for  their  observance  in  all 
acts  for  the  extension  of  the  capital  of  existing  banks 
or  the  creation  of  new  banks  in  Upper  Canada.  The 
acts  of  1832  did  not  embody  the  provisions.  The 
Committee  for  Trade,  in  a  letter  of  the  9th  May, 
1833,  objected  to  this  omission;  their  recommenda 
tions  were  sanctioned  by  the  threat  to  advise  the  ex 
ercise  of  the  royal  prerogative  to  disallow  the  bills 
in  case  they  were  not  properly  amended.  The  news 
of  this  action  was  the  cause  of  the  temporary  panic, 
the  protests  and  petitions  in  Upper  Canada. 

1  Journal,  U.  C.,  1833-34,  ut  supra,  Evidence  of  Mr.  Cartwright. 
2Journal,  U.  C.,  1833-34,  p.  153. 


Imperial  Regulation  of  Colonial  Bank  Charters         69 

An  explanatory  letter  from  the  secretary  to  the 
Lords  Commissioners  of  the  Treasury,  dated  30th 
October,  1833,  announces  the  partial  relaxation  of 
some  of  the  provisions  in  behalf  of  the  Bank  of 
Upper  Canada,  but  insists  that  the  regulations  speci 
fied  should  be  added  to  the  respective  charters.  For 
the  Commercial  Bank  these  were,  briefly: 

1st,  the  charter  of  the  bank  to  be  forfeited  by  a 
suspension  of  specie  payments  for  more  than  sixty 
days,  consecutively  or  during  the  year; 

2d,  the  notes  for  circulation  to  be  dated  at  the  place 
of  issue  and  to  be  payable  upon  demand,  in  specie, 
at  the  place  of  date  and  issue,  as  well  as  at  the  prin 
cipal  office  of  the  bank,  it  being,  however,  expressly 
understood  that  it  is  not  intended  that  any  branch 
shall  be  called  upon  to  pay  the  notes,  either  of  the 
principal  bank  or  other  branches; 

3d,  one-half  of  the  capital  stock  to  be  paid  in 
forthwith,  and  the  moiety  at  the  discretion  of  the 
bank; 

4th,  the  directors  as  drawers,  acceptors  or  indorsers, 
not  to  have  more  than  one-third  of  the  total  discounts 
of  the  bank; 

5th,  the  bank  not  to  hold  its  own  stock  or  to  ad 
vance  money  on  the  credit  of  its  stock; 

6th,  half  yearly  statements  of  the  average  assets 
and  liabilities  to  be  prepared  from  weekly  balance 
sheets  kept  at  the  bank,  and  these,  together  with  a 
statement  of  the  rate  and  amount  of  the  dividend 
and  of  the  amount  of  reserved  profits,  to  be  fur 
nished  to  the  government  and  published;  further 
returns  to  be  furnished  if  called  for,  and  if  required, 
to  be  verified  upon  oath; 


70  The  Canadian  Banking  System,  1817-1890 

7th,  the  shareholders  to  be  respectively  liable  for 
the  engagements  of  the  company,  to  the  extent  of 
twice  the  amount  of  their  subscribed  shares;  that  is, 
to  the  amount  of  their  subscribed  stock,  and  to  an 
equal  amount  in  addition; 

8th,  the  bank  not  to  loan  or  make  advances  on 
lands  or  other  property  not  readily  available  to  meet 
its  engagements;  but  to  confine  its  transactions  to 
what  are  understood  to  be  the  legitimate  operations 
of  banking,  viz.,  advances  upon  commercial  paper 
or  government  securities,  and  general  dealings  in 
money,  bills  of  exchange  and  bullion. 

The  second,  fourth,  sixth  and  eighth  provisions 
were  to  be  applied  to  the  Bank  of  Upper  Canada; 
the  third  and  seventh  to  the  new  shareholders  only.1 

This  correspondence  was  referred  in  January  to  a 
select  committee  of  the  House  of  Assembly.  Bankers 
and  merchants  were  called  on  to  give  evidence  and 
criticise  the  regulations.  On  the  17th  February,  1834, 
the  committee  reported  that  both  the  banks  enjoyed 
the  perfect  confidence  of  the  public,  and  had  con 
fined  themselves  strictly  and  honorably  to  the  limits 
of  their  charters.  The  committee  agreed  that  banks 
with  large  capital  were  preferable  in  point  of  security, 
and  believed  that  in  a  future  distribution  of  bank 
capital  it  would  be  better  to  increase  that  of  existing 
institutions  than  to  create  new  ones.  They  criticised 
the  regulations  with  vehemence,  particularly  the  first 
two,  and  the  sixth;  on  the  seventh  they  failed  to  come 
to  a  decision,  but  the  eighth  was  provided  for  in  ex 
isting  charters.  The  third,  fourth  and  fifth  regula 
tions  were  already  observed  in  the  practice  of  the 

1  Journal,  U.  C.,  1833-34,  p.  63,  Letter  from  the  Hon.  J.  K.  Stewart 
to  R.  W.  Hay,  Esq. 


Imperial  Regulation  of  Colonial  Bank  Charters         71 

banks.  Generally  much  discontent  was  exhibited  at 
the  imperial  interference.  In  the  mean  time,  how 
ever,  the  president  of  the  Commercial  Bank,  to  avert, 
he  said,  "the  ruin  and  distress"  which  immediate 
dissolution  of  the  bank  would  cause  the  shareholders, 
agreed  to  accept  the  imposition  of  the  double  liability. 
The  committee  accordingly  reported  a  bill  applying 
this  and  the  third,  fourth  and  fifth  provisions  to  the 
Commercial  Bank  only.  They  also  proposed  an  ad 
dress  to  the  King,  emphatically  lauding  the  chartered 
banks,  deploring  the  exercise  of  the  royal  veto,  and 
praying  that  the  introduction  of  the  new  provisions 
into  the  charters  should  not  be  insisted  on.  The 
address  was  passed  the  3d  March,  1834,  by  a  vote  of 
thirty-one  to  one.  Action  on  the  bill  reported  was 
postponed.  In  view  of  the  sentiments  expressed  by 
the  colonists  in  numerous  petitions,  of  the  excellent 
practice  of  the  two  banks,  and  of  the  long  time  that 
the  acts  of  1832  had  been  in  force,  the  Treasury  fore- 
bore  to  advise  their  disallowance.1 

The  next  bank  charter  passed  in  Upper  Canada 
embodied  the  second,  fifth,  seventh  and  eighth  of  the 
regulations  suggested  by  the  Committee  for  Trade. 
Thus,  for  the  first  time  in  the  Canadas,  the  public 
security  was  guarded  by  subjecting  the  shareholders 
of  an  incorporated  bank  to  the  double  liability.  But 
for  penalties  for  the  suspension  of  payments  during 
any  lengthened  period,  for  restriction  in  the  amount 
of  discount  to  the  directors,  for  periodical  publication 
of  accounts,  for  the  payment  of  more  than  £10,000 
of  its  capital,  and  subscription  to  more  than  £40,000, 
no  provision  was  made.  This  was  the  act  passed  in 

1  Journal,  U.  C.,  1835,  p.  63,  Letter  of  the  23d  May,  1834,  from 
E.  G.  Stanley. 


72  The  Canadian  Banking  System,  1817-1890 

1835,  incorporating  the  Gore  Bank,  situate  at  Hamil 
ton,  and  having  a  nominal  capital  of  £100,000,  to 
which  the  royal  assent  was  promulgated  the  27th 
October,  1835.  (6  Wm.  IV,  cap.  34.)  To  secure  its 
independent  management,  incorporated  companies 
were  made  incapable  ot  holding  stock  in  the  Gore 
Bank,  except  such  as  should  be  conveyed  to  them  in 
satisfaction  of  debts  previously  contracted.  And 
upon  such  stock  they  were  not  entitled  to  vote. 
Otherwise  the  charter  was  like  the  laws  governing 
the  existing  banks. 

The  Commercial  Bank  had  found  more  capital 
necessary.  During  the  same  session  it  secured  the 
power  to  double  its  stock,  i.  e.,  to  raise  it  from  £100,- 
000  to  £200,000.  The  fourth  and  fifth  of  the  Treasury 
regulations  were  applied  to  the  Commercial  by  this 
act;  the  eighth  provision  already  existed  in  the  origi 
nal  charter.  But  no  precautions  were  taken  to  pro 
vide  for  »the  subscription  and  payment  of  the  addi 
tional  capital,  the  publication  of  accounts,  the  personal 
liability  of  shareholders,  or  the  forfeiture  of  charter 
upon  suspension  of  specie  redemption  for  more  than 
sixty  days.  (6  Wm.  IV,  cap.  33.)  The  omission  of 
the  regulations  mentioned  was  repugnant  to  the  prin 
ciples  laid  down  in  England  with  respect  to  the 
establishment  of  banking  corporations.  Had  he  been 
governed  by  considerations  of  commercial  policy 
alone,  said  Lord  Glenelg,  he  could  not  have  advised 
the  confirmation  of  these  acts  in  the  form  in  which 
they  passed.  But  aware  of  the  importance  attached 
to  their  confirmation  in  the  province,  and  unwilling  at 
that  time  to  advise  the  disallowance  of  acts  which 
had  received  the  colonial  sanction,  he  decided  not  to 
enforce  those  principles,  in  the  present  instance, 


The  Growth  and  Cure  of  the  Banking  Mania  73 

against  the  judgment  of  the  provincial  legislature.1 
Although  the  improvement  of  the  acts  was  recom 
mended  to  the  next  session,  the  banks  first  estab 
lished  in  Upper  Canada  were  not  subjected  to  all  the 
Treasury  regulations  until  five  years  later,  when,  in 
1841,  the  new  suggestions  of  the  imperial  authorities 
were  adopted  practically  in  full. 


§12. THE  GROWTH  AND  CURE  OF  THE  BANKING  MANIA 

The  demand  for  accommodation  was  not  to  be  sat 
isfied,  apparently,  even  by  these  additions  to  the 
banking  capital  of  the  province.  Another  phase  of 
the  speculative  movement  and  general  expansion  was 
inaugurated  by  a  group  from  the  Reform  party.  The 
faction  in  control  of  the  government,  and  all-power 
ful,  likewise,  in  the  chartered  banks,  favored  limiting 
their  number  and  requiring  legislative  sanction  for 
each  incorporation  or  addition  to  capital.  Not  so  the 
Reformers.  In  1831  and  1831-32  they  had  proposed 
to  the  Assembly  general  banking  laws;  in  1833-34  a 
bill  "to  make  general  the  privilege  of  banking:"  in 
1835  another  "to  establish  an  uniform  system  of 
banking;"  in  1836  a  third  "for  the  better  regulation 
of  banks  and  for  protecting  the  interests  of  the  pub 
lic. ":  They  displayed  generally  the  desire  to  open  ' 
the  business  to  all  who  should  wish  to  enter  it. 

The  legal  obstacles  to  such  a  freedom  were  not 
particularly  difficult  even  as  the  law  stood.  British 
statutes  of  15  and  17  Geo.  Ill,  prohibiting  certain 
small  notes  and  inland  bills  -of  exchange,  were 

1  Journal,  U.  C.,  1836,  p.  264,  Despatch  of  llth  September,  1835. 

2  Vide  Journal,  U.  C.,  for  the  years  mentioned. 


74  The  Canadian  Banking  System,  1817-1390 

declared  of  no  force  in  Upper  Canada  by  an  act  of 
1821  (2  Geo.  IV,  cap.  12),  and  though  the  lack  of 
Corporate  powers  to  sue  was  inconvenient,  a  joint- 
stock  association  could  carry  on  its  business  and  even 
issue  notes  without  much  danger  of  legal  penalties. 
A  private  bank  started  by  two  partners  in  1834  was, 
in  fact,  taken  over  by  the  group  of  Reformers  and 
organized  under  a  deed  of  settlement  as  the  Farmers' 
Joint  Banking  Company.  They  began  business  in 
September,  1835,  with  a  paid-in  capital  which  never 
rose  above  £50,000.  But  as  the  president  and  solic 
itor  were  both  elected  from  the  dominant  party,  the 
disappointed  Reformers  left  the  bank  and  in  Decem 
ber,  1835,  started  a  similar  company  called  the  Bank 
of  the  People.1  Twelve  months  after  this  bank  opened 
its  doors  with  a  paid-in  capital  of  about  £13,000,  the 
Niagara  Suspension  Bridge  Bank  was  established  by 
a  party  of  Americans.  Though  it  kept  agencies  in 
Chippewa,  and  in  Lockport,  New  York,  its  capital 
was  even  less.  Meanwhile,  Captain  Geo.  Truscott, 
R.  N.,  and  one  J.  C.  Green,  an  ex-commissariat  officer, 
the  former  proprietors  of  the  Farmers'  Bank,  started 
a  weak-kneed  concern  under  the  name  of  the  Agri 
cultural  Bank. 

But  it  was  not  long  before  an  act  of  1837  (7  Wm. 
IV,  cap.  13),  laid  down  the  principle,  ever  thereafter 
to  obtain  in  Canada,  that  it  is  "inconsistent  with  a 
due  regard  to  the  protection  of  commerce  and  the 
welfare  and  security  of  the  people,  that  any  person 
or  number  of  persons,  some  of  whom  may  be  of 
doubtful  solvency,  should  be  allowed,  without  legis- 

1  "Reminiscences  of  his  Public  Life,"  by  Sir  Francis  Hincks,  p. 
11,  and  Journal,  U.  C.,  1837-38,  Appendix,  p.  223,  also  Journal  U. 
C.,  1837,  2d  Session,  Appendix. 


The  Growtli  and  Cure  of  the  Banking  Mania  75 

lative  authority,  to  issue  their  promissory  notes  for 
circulation  as  money."  A  summary  stop  was  put  to  the 
increase  of  such  banks  by  making  unauthorized  note 
issue  a  misdemeanor  after  the  1st  July,  and  contracts 
concerning  the  notes  null  and  void.  Exceptions  were 
granted  in  favor  of  the  four  private  banks  just  men 
tioned  and  the  Bank  of  British  North  America. 
Other  banks  were  enabled  by  7  and  8  Wm.  IV,  cap.  1 , 
to  collect  their  debts,  enforce  the  payment  of  stock 
subscriptions,  and  close  up  their  affairs  through  com 
missioners  appointed  under  provincial  authority. 

The  mention  of  certain  attempts  to  alter  the  legis 
lation  dealing  with  them  conveys  no  idea  of  the  craze 
for  banks  and  the  excitement  on  banking  questions 
which  spread  through  the  province  at  this  time.  A 
better  indication  is  the  fact  that  between  1881  and 
1840  no  less  than  twenty-five  public  bills  on  the  sub 
ject,  which  eventually  failed  of  passing,  were  brought 
before  the  Assembly,  and  received  more  or  less  con 
sideration.  Naturally  an  agitation  carried  so  far, 
carried  on  largely  in  the  interests  of  borrowers,  and 
carried  on  in  a  time  of  unusual  activity,  over-trading1 
and  land  speculation,2  was  not  entirely  for  measures 
recommended  by  prudence  or  sound  policy.  In 
1833  the  House  of  Assembly  passed  a  bill  to  enable 
the  Receiver-General  to  issue  bank  notes  chargeable 
on  the  public.  A  select  committee  in  1835  reported 
in  favor  of  establishing  a  provincial  bank  on  the 
basis  of  loans  guaranteed  by  the  province,  the  profits 
to  pay  the  interest  on  the  public  debt.3 

1  Journal,  U.  C.,  1837-38,  Report  of  the  Select  Committee  upon  the 
Subject  of  Banking,  Appendix,  p.  212. 

2  Journal  of  the  Legislative  Council  of  the  Province  of  Canada, 
1837,  Appendix  A,  Evidence  of  Mr.  Cartw  right. 

3Journal,  U.  C.,  1835,  Appendix  iii. 


76  The  Canadian  Banking  System,  1817-1890 

Such  "simple  fiscal  arrangements"  found  no  favor 
with  the  Colonial  Office  in  London.     In  a  despatch 
dated  the  31st  August,  1836,  Lord  Glenelg,  His  Maj 
esty's  Principal  Secretary  of  State  for  the  Colonies, 
radically  altered  the  manner  in  which  the  acts  passed 
by  the  legislature  of  Upper  Canada  with  respect  to 
banking  and  currency,  acquired  statutory  force.   For 
ten   years,   at  least,  the  Lieutenant-Governor,  unless 
there    were    peculiar  reasons    for   reserving   it,   had 
granted  the  royal  assent  to  such  measures  at  the  close 
of  the  session  in  which  they  were  passed.    Thus  they 
became    law    immediately.     If    the    measures    were 
unsatisfactory  to  the  Colonial  Office,  the  remedy  was 
to    advise    the    royal    disallowance,    after,    perhaps, 
numerous    and    important    engagements    had    been 
entered  into  under  the  acts.    But  now  the  Lieutenant- 
Governor  was  instructed  not  to  permit  any  act,  ordin 
ance  or  regulation  touching  the  circulation  of  prom 
issory  notes  or  the  local  legal  tender,  to  come  into 
operation  in  the  colony,  without  having  first  received 
the  royal  sanction  conveyed  to  him  by  the  Secretary 
of  State.1     The  Assembly,  at  this,  passed  resolutions; 
with    the    Legislative  Council,    they  adopted  a  joint 
address  to  the  King.     In  this  they  affirmed  that  bills 
for  establishing  banks  were  purely  local,  and  though 
acknowledging  the  constitutional  right  of  His  Maj 
esty  to  act  his  pleasure  upon  any  bill,  strongly  dep 
recated  the  exercise  of  that  right  -upon  matters  of  a 
local  nature.2 

The  ministers  of  the  crown,  however,  had  observed 
the  progress  of  commercial  speculations,  particularly 
in  North  America.  They  saw  only  too  much  reason 
to  anticipate  the  rapid  approach  of  a  period  in  which 

i  Journal,  U.  C.,  1837,  p.  321. 

2 Journal,  U.  C.,  20th  January,  1837,  pp.  321,322. 


The  Growth  and  Cure  of  the  Banking  Mania  77 

the  multiplication  of  ill-secured  representatives  of 
coined  money  would  involve  the  British  American 
colonies  in  most  serious  financial  difficulties.  Their 
single  resource  to  avert  the  danger  was  the  royal 
power  of  disallowance,  but  the  exertion  of  this  was 
always  reluctant;  when  large  capitals  had  been  em 
barked,  and  many  contracts  made,  it  was  extremely 
difficult.  The  reservation  of  the  laws  for  the  imperial 
sanction  before  they  came  into  effect  was,  therefore, 
the  only  practical  plan.  But  the  instructions  were 
not  the  outcome  of  occasional  motives  only,  or  of  a 
policy  merely  temporary.  They  were  prompted  by 
the  permanent  purpose  not  to  allow  the  creation  of 
corporate  bodies,  permitted  to  issue  a  paper  currency, 
" without  all  the  necessary  limitations  upon  its  extent 
and  legal  character."1 

Events  proved  that  Lord  Glenelg's  instructions 
were  well  advised.  During  the  session  of  1836-37 
the  banking  mania  seems  thoroughly  to  have  infected 
both  the  legislature  and  the  whole  province.2  Bills 
were  passed  to  increase  the  aggregate  capital  of  the 
chartered  banks  in  this  province  of  400,000  people, 
from  £500,000  to  £4,500,000,  and  to  confer  a  power  of 
issuing  notes  to  the  extent  of  £13,500,000. l<  Nine  new 
banks  were  a  part  of  the  scheme,  another  feature  of 
which  was  to  make  the  province  a  large  shareholder 
in  the  Bank  of  Upper  Canada.  The  effect  of  the 
latter  would  have  been  to  render  the  bank  one  of  the 
chief  departments  of  the  local  administration.  Accord 
ing  to  instructions,  the  Lieutenant-Governor  reserved 
the  bills,  and  sent  them  on  to  England.  There  they 
met  the  scathing  criticism  they  deserved.  The  impe- 

1  Journal,  U.  C.,  1839,  p.  40  u,  Despatch  of  the  28th  Dec.,  1839. 
2Cf.   The  Patriot  newspaper,  Toronto,  issue  of  8th  November,  1830. 
Journal,  U.  C.,  1837-38,  p.  208. 


78  The  Canadian  Banking  System,  1817-1890 

rial  authorities,  nevertheless,  were  willing  neither  to 
disallow  the  whole  series  nor  to  pick  out  the  unob 
jectionable  measures  worthy  of  passing.  Decision 
was  suspended  for  the  time  being.  None  of  the  acts 
was  allowed  to  take  effect,  but  all  were  referred 
back  to  the  colonial  legislature  for  more  sober  consi 
deration.  Before  Parliament  again  met  in  regular 
session,  events  in  Canada  somewhat  calmed  the  bank 
ing  excitement.  Not  a  single  one  of  the  reserved 
bills  was  re-enacted.  In  December,  1837,  a  second 
series  of  rules,  drawn  up  by  the  Committee  for  Trade, 
and  recommended  by  great  experience  and  much 
careful  reflection,  were  forwarded  by  Lord  Glenelg, 
with  the  advice  that  they  should  be  adopted  by  the 
•  local  legislature  for  its  own  guidance,  and  as  terms 
to  be  insisted  upon  in  all  charters  for  the  incorpora 
tion  of  banking  companies.  The  instructions  so  dis 
liked  by  the  colonists,  the  occasional  motives  for  tnem 
having  disappeared,  were  withdrawn  at  the  same 
time.1 

Only  the  insistence  of  the  imperial  authorities  se 
cured  to  Upper  Canadians  the  additional  safeguards 
in  the  bank  acts  of  1835.  In  1836  and  1837  only  the 
firm  restraint  and  cool  judgment  of  these  officials 
saved  Upper  Canadians  from  the  consequences  of 
their  banking  frenzy.  The  instructions  of  August 
prevented  the  establishment  of  banks  with  a  nomi 
nal  capital  of  over  four  millions  sterling,  on  the  eve 
of  the  most  disastrous  crisis  which  North  America 
had  ever  experienced.  They  mitigated  in  great  de 
gree,  though  they  could  not  avert,  the  calamities 
which  were  soon  to  befall  the  provincials  in  conse 
quence  of  their  own  mistakes,  and  suspension  of 
specie  payments  in  the  United  States.  Where  super- 
journal,  U.C.,  1839,  p.  40  v. 


Practice  of  the  Banks  79 

vision  by  the  Colonial  Office  over  colonial  legislation 
and  Treasury  regulation  of  colonial  bank  charters 
again  appear  in  our  narrative,  there  will  be  found 
additional  proof  of  their  beneficial  influence  upon  the 
Canadian  banking  system. 


§13. — PRACTICE    OF    THE    BANKS 

The  details  in  which  the  business  carried  on  by  the 
Upper  Canada  banks  in  the  thirties  differs  from  that 
of  the  Ontario  banks  of  to-day,  were  due  partly  to 
conditions,  partly  to  principle.  Slow  communications, 
e,  g.,  caused  exchanges  between  the  banks  to  be  less 
frequent;  they  were  effected  weekly  instead  of  daily. 
But  settlements  were  made  in  drafts  on  Montreal  or 
New  York,  or  in  specie,  practically  as  they  are  to-day.1 
The  small  amount  of  good  collateral  security,  bonds 
and  stocks  in  the  province  caused  more  loans  to  be 
made  upon  personal  security,  i.  e.,  notes  with  one  or 
more  indorsements,  and  fewer  loans  secured  by  docu 
ments.  In  the  scarcity  of  marketable  personaltVj 
the  banks  suffered  great  temptation  to  loan  upon  real 
estate  security,  in  forms  more  or  less  disguised. 
Events  proved  that  not  all  of  them  resisted.  The 
Commercial  Bank  introduced  a  system  of  cash  cred 
its  in  imitation  of  the  Scotch  practice.  Where  a 
bank's  customers  have  little  other  wealth  than  land, 
this  is  a  pretty  close  approach  to  loaning  upon  the 
security  of  land.  It  is  doubtful,  too,  whether  proper 
conditions  for  extending  cash  credits  existed  in 
Canada.  Certainly  there  was  no  analogy  between 
the  constant  market  for  Scotch  real  estate  and  the 
occasional  opportunity  to  sell  Canadian  lands.  And 

1  Journal,  U.  C.,  1837,  2d  Session,  Appendix,  Report  of  the  Select 
Committee  to  which  was  referred  the  subject  of  the  Monetary  Sys 
tem  of  the  Province. 


80 


The  Canadian  Banking  System,  1817-1890 


yet  the  price  under  the  auctioneer's  hammer  is  the 
only  test  of  the  immediately  available  value  of  land. 

Up  to  1832  the  Bank  of  Upper  Canada,  having  no 
local  competitors  to  present  its  notes  for  redemption, 
was  able  to  keep  out  a  larger  circulation.  And  with 
the  help  of  this  it  could  discount  for  ninety  days 
with  leave  to  retire  by  payments  of  one-fifth  every 
three  months,  the  term  of  credit  being  fifteen  months. 
The  extent  of  its  operations  in  those  palmy  days  has 
been  indicated  by  the  returns  already  given. 

In  1836  the  three  chartered  banks  reported:1 


: 

3ankofUp-,( 
>er  Canada, 
Nov.  16, 
18G6 

yommercial 
Bank, 
Nov.  7, 
1836 

3-o  re  Bank 
Nov.  28, 
183(5 

LIABILITIES  (shillings  and  pence 
omitted). 

£ 
200,000 
180,826 
45,828     ! 
4,362  ) 
788| 

154,604 
3,016 

£ 
18(>,450 
119,873 
55,250 

10,834 

29,165 
4,201 

£ 
61,005 
1,617 
27,913 

6,241 
1,053 

Notes  in  circulation,  $5  and  upw'ds. 
Notes  in  circulation  under  $5  

Balance  due  to  agencies  (in  transitu) 
Cash  deposited,  including  all  sums! 
not  in  the  foregoing  heads  and 

Cash  deposited  bearing  interest.  .  .  . 

RESOURCES  OF  THE  BANK. 
Gold,  silver  and  other  coined  metals 

589.426 

405,774 

96,212 

63,796 
8,880 
18,045 

84,728 
413,976 

46,935 
3,729 
5,318 

18,082 
331,709 

20,832 
847 
2,642 

3,385 

i 

68,504 

Real  estate  and  bank  furniture  
Bills  of  other  banks  
Balances  due  from  other  banks  and 
foreign  agencies  in  London  and 
New   York    on   exchange    trans- 

Amount  of  all  debts  due,  including 
notes,  bills  of  exchange,  and  all 
stock  and  funded  debts  of  every 
description,  except  in  the  balances 
due  from  other  banks  

Total  resources  

589,426 

405.774 

96,212 

MISCELLANEOUS. 
Amount  of  reserved    profits    after 

11,073 
56,355 

1,912 
11,582 

1,324 

Overdue  debts  

Journal,  U.  C.,  1837,  pp.  73,  89,  128. 


Practice  of  the  Banks 


81 


In   1837  the  principal  items  for  the  chartered  as 
well  as  the  private  banks  were,  on  the  15th  June  : 1 


Bank  of  Upper  Canada  j 
Commercial  Bank....] 
Gore  Bank 

Total  chartered  b'ks; 

Farmers'  Bank 

Bank  of  the  People. . . 

Agricultural  Bank | 

Niagara  S.  B.  Bank...  j 

Total  private  banks. 
Grand  total. . 


Capital 

Notes  in 

Loans 

stock 
paid-up 

circula 
tion 

Specie 

Deposits 

and 
discounts 

£ 

£ 

£ 

£ 

£ 

200,000 

168,906 

37,850 

158,548 

444,958 

196,597 

116,092 

23,102 

37,644 

344,088 

80,381 

34,246 

17,932 

8,379 

105,993 

476,978 

319,244 

78,884 

204,571 

895,039 

38,221 

23  800 

5  660 

50  316 

12,375 

12,633 

2,890 

7,330 

23,896 

39,727 

18,612 

3,544 

3,500 

51,181 

7,700 

16,103 

2,363 

1,598 

18,235 

98,023 

71,148 

14,457 

12,328 

143.718 

575,001 

390,392 

93,341 

216,899 

1,039,757 

The  value  of  competition  in  banking  was  well 
illustrated  when  the  Commercial  Bank  entered  the 
Upper  Canada  field.  It  was  active  in  presenting  the 
notes  of  the  competing  bank  for  redemption.  A  per 
son  securing  the  discount  of  a  note  payable  in  ninety 
days  could  now  have  it  renewed  for  a  further  period 
of  ninety  days  only  on  payment  of  one-third  of  the 
original  advance,  and  at  the  expiry  of  this  second 
period  it  was  necessary  to  pay  back  a  second  third 
of  the  original  advance  if  the  borrower  wished  to 
have  the  time  for  paying  the  last  third  extended  for 
a  further  period  of  ninety  days.  The  whole  amount 
of  the  advance,  under  this  arrangement,  was  not 
repaid  until  nine  months  after  it  had  been  made. 
The  result  was  good,  for  the  term  during  which  mer 
chants  were  responsible  as  indorsers  was  lessened; 
they  were  able  more  accurately  to  provide  for  their 
liabilities;  and  persons  of  moderate  means  borrowed 

Journal,  U.  C.,  1837,  pp.  73,  89,  128. 
6 


82  The  Canadian  Banking  System,  1817-1890 

less  than  before,  and  not  more  than  could  be  paid  in 
the  shorter  time.1  The  further  advantage  of  secur 
ing  frequent  tests  of  the  convertibility  of  bank  notes, 
by  actual  redemption,  need  only  be  mentioned. 

Chartered  as  well  as  private  banks  established  no 
branches  in  the  sense  that  their  notes  were  payable 
at  any  other  place  than  their  principal  establish 
ments.2  The  plan  of  redeeming  bank  notes  at  but 
one  place,  and  that  the  bank's  head  office,  permits  an 
economy  of  specie,  a  strong  central  reserve,  a  sta 
bility  and  security  in  the  bank's  own  procedure  that 
would  be  impossible,  with  the  same  rate  of  profit,  were 
it  necessary  to  meet  demands  for  redemption  at  all  the 
offices  of  the  bank.  Of  what  were  technically  termed 
offices  of  discount  and  deposit,  but  really  branch  banks 
in  all  save  the  function  of  issue,  the  Upper  Canada 
Bank  had  four  in  1837,  the  Commercial  three,  the 
Gore  none.  Of  agencies,  chiefly  employed  for  pay 
ments,  collections  and  the  purchase  of  exchange,3 
they  had  one,4  eleven  and  none  respectively.5 

1  Journal,  U.  C.  1833-34,  Appendix,  p.  169  et  seq. 

2Except  the  Niagara  Suspension  Bridge  Bank,  which  issued  some 
notes  payable  at  Lockport,  N.  Y. 

3  More  specifically  an  agent's  business  was  to  discount  bills  on  Lower 
Canada,  New  York,  or  any  part  of  the  province,  to  receive  bills  of 
individuals  for  collection,  to  receive  deposits  and  to  forward  and 
advise  on  notes  offered  to  him  for  discount  by  persons  in  his  dis 
trict,  to  pay  the  proceeds  when  discounted,  to  receive  payments 
when  due,  and  generally  to  do  anything  required  by  the  bank.  He 
had  balances  on  hand  and  drew  upon  the  principal  bank.  It  was 
his  duty  to  use  its  notes  in  his  disbursements,  and  on  all  payments 
he  received  one-quarter  of  one  per  cent,  commission.  The  offices 
had  boards  appointed  from  the  local  shareholders,  and  exercised 
their  own  discretion,  subject  of  course  to  instruction,  in  discounting. 
Upper  Canada  King's  Bench  Reports,  6  Wm.  IV  to  2  Vic.,  p.  541. 

4It  is  probable  that  the  number  of  agencies  established  by  the 
Bank  of  Upper  Canada  is  misstated  in  the  document  cited  in  note 
4;  and  that  it  had  at  least  as  many  as  the  Commercial  Bank.  An 
advertisement  in  the  Kingston  Patriot,  17th  July,  1832,  mentions 
four  agencies. 

5 Journal,  U.  C.,  1837-38,  Appendix,  pp.  221,  225  and  229. 


Practice  of  the  Banks  83 

A  liberal  foreign  correspondence  had  been  estab 
lished  and  funds  deposited  in  London,  New  York 
City  and  Montreal,  against  which  the  banks  drew 
exchange,  usually  with  a  material  profit.1  The  balance 
of  trade  with  Lower  Canada  and  the  United  States 
was  adverse  in  both  cases.2  To  meet  this  difficulty 
and  to  acquire  funds  in  New  York  at  the  least  cost, 
certain  of  the  banks  discounted,  to  some  extent, 
American  bills  payable  in  that  city.3  A  balance 
there  was  always  desirable,  for  sterling  exchange 
could  sometimes  be  bought  at  three  to  four  per  cent, 
under  the  Canada  rate.4  The  banks  also  discounted 
large  amounts  of  merchants'  and  shippers'  bills  drawn 
against  consignments  of  wheat,  flour,  pork  and  other 
produce.  The  means  for  extending  to  lumbermen 
and  produce  buyers  the  five  or  six  months'  credit 
needed  during  the  winter  and  early  spring,  and  wait 
ing  for  repayment  out  of  the  proceeds  of  the  sales  in 
foreign  markets,  were  much  desired,  but  the  banking 
capital  was  quite  inadequate  to  such  support.5  It  was^ 
perhaps,  quite  as  well  that  even  leading  trades  should 
supply  their  own  capital. 

The  note  circulation  bore  a  much  higher  ratio  to 
capital  during  the  first  decade  of  the  Bank  of  Upper 
Canada's  experience  than  ever  afterwards.  The  pro 
portion  fell  from  250  per  cent,  in  1826  to  187  per  cent, 
in  1831.  After  the  competition  of  the  newer  banks 
became  effective,  it  fell  still  more,  and  in  1834  to  1836 
seldom  rose  more  than  20  per  cent,  above  the  paid-in 

1  Journal,  U.  C.,  1833-34,  Appendix,  p.  102  et  seq. 
-Journal  Legislative  Council,  U.  C.,  1837,  Appendix  A,  p.  41. 
3Journal,  U.C.,  1837,  Appendix,  ut  supra,  p.  18. 
*lbid,  p.  37. 

^Journal,  U.  C.,  1833-34,  Appendix,  p.  170,  Testimony  of  Thomas 
G.  Ridout. 


84  The  Canadian  Banking  System,  1817-1890 

capital.     The  total  circulation  of  the  chartered  banks 
was  on  the 

1st  January,  ]834 £267,209 

1835 333,715 

1836 332,178 

1837 404,823 

On  the  latter  date  the  four  private  banks  had  £85,. 
451  outstanding,  making  the  total  circulation  of  the 
province  £490,274.  This  excludes  the  notes  of  Lower 
Canada  banks,  which  had  some  currency  in  spite  of 
the  law  against  them.  (4  Geo.  IV,  cap.  13.)  It  in 
cludes,  on  the  other  hand,  the  considerable  circula 
tion  of  small  notes  in  the  United  States,  especially 
in  the  western  counties  of  New  York  and  those  bor 
dering  on  the  river  St.  Lawrence.1  The  banks  were 
afterwards  to  find  their  American  circulation  a  source 
more  of  trouble  than  of  profit.  Already  some  of  the 
bankers  in  the  Western  states  found  it  cheaper,  by 
using  the  private  banks  as  brokers,  to  get  gold  on 
the  notes  of  Canadian  chartered  banks  than  to  bring 
specie  from  the  seaboard.2  For  purposes  of  redemp 
tion  and  shipment,  recourse  was  had  to  the  specie 
markets  of  Montreal  and  New  York.  The  silver  cir 
culation  was  composed,  for  the  most  part,  of  coins 
struck  in  the  mint  at  Philadelphia.  These  facts  led 
one  of  the  ablest  witnesses  before  the  Committee  of 
1837  to  call  the  province  -'a  limb  of  the  monetary 
system"  of  the  United  States.3  Five  hundred  and 
fifty  thousand  pounds  currency,  $2,200,000,  were  im 
ported  by  the  banks  between  1830  and  1836. 4 
deport  of  the  New  York  Bank  Commissioners,  1835. 

2  Journal,  U.  C.,  1833-34,  ut  supra. 

3  Journal,  U.  C.,  1837,  Report  of  the  Select  Committee  to  which  was 
referred  the  subject  of  the  Monetary  System  of  the   Province,  Ap 
pendix,  p.  34,  Evidence  of  Benj.  Thome. 

4 Journal,  Canada,  1841,  Appendix  0.    The  Bank  of  Upper  Canada 
imported   £465,000  of  the   sum   mentioned.      Nine-tenths  of  this 


Practice  of  the  Banks  85 

The  directorates  enjoyed  no  such  large  proportion 
of  the  discounts  as  those  in  the  Lower  Province.  In 
1834  the  accommodation  extended  to  the  directors 
had  never  exceeded  one-sixth  of  the  total  discounts. 
The  directors  of  the  Bank  of  Upper  Canada  had 
never  had  more  than  the  twentieth  part,  either  as 
promissors  or  indorsers. 

In  their  general  business  of  loaning,  the  banks 
doubtless  supplied  a  market  wider,  in  some  respects, 
than  they  do  to-day.  Other  forms  of  credit  institu 
tions  were  not  yet  developed.  So,  in  1835,  the  cashier 
of  the  Bank  of  Upper  Canada  said:  ••In  my  opinion, 
every  farmer  or  person  in  trade  or  in  reputable  cir 
cumstances,  who  can  give  unexceptionable  personal 
security,  has  a  right  to  secure  from  the  public  banks 
reasonable  accommodation  in  proportion  to  his  means, 
without  being  considered  to  ask  for  favors."1  The 
period  was  one  in  which  politicians,  lawyers,  land 
owners  and  adventurers  were  able  to  secure  generous 
grants  from  the  loanable  funds  of  the  banks.  The 
banks  did  not.  as  now,  observe  the  principle  that  credit 
should  be  based  either  on  an  exchange  of  commodi 
ties  or  an  increase  of  commodities.  The  effort  to 
adapt  the  Scotch  cash  credits  to  Canadian  conditions 
has  been  mentioned.  Yet  the  essential  character 
istics  of  Scotch  banking  were  not  generally  appre 
ciated  in  the  Upper  Province,  nor  its  traditions  fol 
lowed.  The  banks  were  not,  as  now,  predominantly 
commercial  and  industrial  banks.  Indeed,  when  the 
Bank  of  Montreal  proposed  in  1839  to  extend  its 
operations  to  the  Upper  Province,  the  plan  was  wel- 

they  estimated  was  issued  to  the  private  banks,  the  greater  part  of 
which  was  sold  at  a  small  advance  in  the  United  States.  Journal, 
IT.  C.,  1837,  Appendix,  p.  37. 

]  Journal,  U.C..  1835,  Appendix  iii,  Evidence  of  Thomas  G.  Ridout. 


86  The  Canadian  Banking  System,  1817-1890 

corned  by  informed  observers  as  promising  essential 
benefits,  "  for  in  a  short  time  it  would  instruct  our 
directors  in  the  system  of  commercial  banking,  which 
very  few  of  them  understood."1 

Were  many  more  charges  laid  against  them  it 
would  be  necessary  still  to  acknowledge  that  the 
banks  were  of  great,  of  incalculable  service  to  the 
colony.  In  a  young,  thinly  settled,  scarcely  exploited 
but  advancing  country,  there  ought  not,  perhaps,  to 
be  enforced  the  maxims  and  limits  of  banking  appli 
cable  to  a  wealthier  community  with  a  credit  organi 
zation  developed  on  many  sides.  Elsewhere,  cer 
tainly,  the  rigid  rules  have  not  been  enforced,  through 
periods  of  which  every  reader  can  provide  examples. 
The  contrast  with  contemporary  American  banks  arid 
American  practice,  even  in  the  state  of  New  York, 
is,  in  respect  at  least  to  stability  and  the  public  secu 
rity,  entirely  in  favor  of  the  Upper  Canadian  insti 
tutions.  For  over  forty  years  not  a  single  bank 
chartered  by  Upper  Canada  failed.  During  that  time 
they  earned  good  dividends  for  their  shareholders, 
and,  by  increasing  their  capital  and  establishments, 
kept  pace  with  the  growing  needs  of  the  province. 
The  period  marked  by  wreck  and  ruin  in  the  states 
on  the  south,  they  survived  with  numbers  intact  and 
solvency  unimpaired. 

Journal,  U.  C.,  1839,  Appendix,  vol.  II,  part  ii,  Third  Eeport  of 
the  Select  Committee  on  Banking,  p.  771,  Evidence  of  Francis 
Hincks. 


Suspension  of  Specie  Payments  and  Crisis  0/1837     87 

§14. THE  SUSPENSION  OF  SPECIE  PAYMENTS  AND  THE 

CRISIS  OF  1837 

The  suspension  of  specie  payments  by  the  Ameri 
can  banks  on  the  llth  and  12th  May,  1837,  and  the 
following  days  necessarily  affected  the  banks  in 
Lower  Canada.  The  more  active  and  pressing  de 
mand  for  specie  in  the  markets  of  the  United  States 
immediately  caused  a  heavy  drain  of  specie  upon 
their  vaults.  Sterling  exchange  had  risen  to  a  figure 
where  anything  but  the  export  of  specie  would  have 
been  ruinous  to  the  remitter.  The  reserves  could  not 
be  augmented  by  imports  in  time  to  meet  the  extra 
ordinary  proportion  of  demand  claims  that  were  pre 
sented  for  payment.  It  was  necessary  to  do  some 
thing  to  save  what  gold  they  still  had,  and  to  prevent 
the  contraction  of  circulation  and  discounts  which, 
though  essential  to  the  maintenance  of  specie  pay 
ments,  would  have  been  disastrous  in  the  involved 
condition  of  the  commercial  community.  The  Lower 
Canada  banks  suspended  on  the  18th  May,  1837. x 

For  Upper  Canada  this  seemed  like  an  added  blow. 
Its  people  had  not  yet  awakened  to  the  situation. 
They  were  still  scheming  to  secure  more  banking 
capital.  They  generally  misinterpreted  the  causes  of 
the  movement  of  the  precious  metals  toward  the 
United  States  and  London.  The  convertibility  of 
Upper  Canada  bank  paper,  said  an  official  report, 
was  vested  on  the  good  faith  of  the  governments  of 
the  United  States,  Lower  Canada  and  Upper  Canada 
in  preserving  the  equal  value  of  their  common  cur 
rency.2  This  was  their  euphemism  for  the  fact  that 

1  Journal,  Can.,  1859,  Report  and  Proceedings  of  the  Committee 
on  Banking  and  Currency,  Appendix  no.  67. 

2 Journal,  U.  C.,  1837,  2d  session,  Appendix,  Report  of  the  Select 
Committee  on  the  Monetary  System. 


88  The  Canadian  Banking  System,  1817-1890 

New  York  and  Montreal  were  the  specie  marts  for 
Upper  Canada,  and  that  the  price  was  then  higher 
than  the  provincials  cared  to  pay.  They  failed  also 
to  realize  the  necessity  for  a  general  contraction, 
once  the  crisis  had  come.  The  leader  of  the  Reform 
ers,  however,  Wm.  Lyon  Mackenzie,  was  guilty  of 
instigating  a  run  on  the  Bank  of  Upper  Canada. 
But  the  bank  paid  the  notes  in  silver  and  kept  friends 
at  the  counter  who,  at  night,  trundled  the  specie 
back  in  a  wheelbarrow.1 

By  the  15th  June  the  effect  of  the  specie  drain  had 
been  considerable,  as  the  statement  of  circulation  and 
specie  will  show.2 


Circulation 

I   Chartered 
Banks 

Private 
Banks 

Total 

1st  January    1837 

£404  823 

£85  451 

£490  °74 

15th  May    1837 

423  401 

85  495 

508  89(> 

15th  June    1837 

319  944 

71  148 

390  392 

Difference  between  May  and  June,  £104,157  £14,347  £118,504 
Specie 

15th  May,   1837  '. £107,334  £13,455  !  £120,789 

15th  June,  1837 78,884  14,457  93,341 


Difference  between  May  and  June,     £28,450 


£1,002    !    £27,448 


But  the  Bank  of  Upper  Canada  had  imported  specie 
for  £40,000  between  the  two  dates.  The  total  loss  of 
specie,  therefore,  was  £67,448  instead  of  £27,448,  and 
yet  011  the  20th  June  the  banks  were  still  maintain 
ing  payments,  and  their  notes  were  at  par  with  specie. 
To  do  this,  they  had  been  obliged  to  call  in  their  dis 
counts  and  suffer  a  contraction  of  25  per  cent,  in  the 

'Charles  Lindsey,  "The  Life  and  Times  of  AVm.  Lyon  Macken 
zie,"  Toronto,  1862,  p.  34. 
2  Vide  note  2,  p.  83. 


Suspension  of  Specie  Payments  and  Crisis  0/1837     89 

note  circulation.  So  far  as  the  granting  of  credit 
was  concerned,  banking  operations  had  practically 
ceased. 

The  withdrawal  of  the  credit  accommodation 
usually  extended  to  merchants  was  not  the  sole 
cause,  or  the  deepest,  of  the  commercial  embarrass 
ment.  The  wet  harvest  of  1885  and  the  reduced 
value  of  wheat  in  that  year  had  lessened  materially 
the  wealth  in  the  hanfls  of  the  farming  community. 
They  comprised  at  least  two-thirds  of  the  population. 
They  had  suffered  from  the  short  crops  of  1836,  and 
had  fixed  rather  rash  proportions  of  their  capital  in 
land  and  improvements.  Other  debtors,  having 
invested  sums  obtained  from  bank  discounts  in  long 
speculations,  now  found  it  impossible  to  retire  their 
paper.1  The  shipments  of  wheat,  flour,  pork  and 
other  produce  to  Lower  Canada  were  less  in  the  spring 
of  1837  than  in  former  years.  The  practice  being  to 
draw  against  such  shipments  to  pay  for  the  purchases 
of  the  preceding  year,  the  merchants  had  less  where 
with  to  meet  accrued  claims  against  them.  The  bal 
ance  of  trade  was  thus  still  more  heavily  against 
Upper  Canada,  and  in  favor  of  the  Lower  Province 
and  the  United  States.  The  consequences  were 
increased  tendency  to  export  specie  and  intensified 
demand  for  discount  accommodation  from  the  banks.2 
The  house  of  Thos.  Wilson  &  Co.,  London,  bankers, 
and  financial  agents  for  the  province,  stopped  pay 
ment  the  2d  June.  Bills  of  exchange  drawn  upon 
them  went  to  protest,  and  about  £'83,000  stg.,  the 
balance  of  provincial  moneys  still  in  their  hands, 
appeared  to  be  in  jeopardy.3 

Journal,  IT.  C.,  1887-38,  Appendix,  p.  212. 
2 Journal,  U.  C.,  1837,  Appendix,  ut  supra. 

^Journal,   U.  C.,   1837-38,  Appendix,   p.  122.     But  the  sum  was 
afterwards  recovered  with  interest. 


90  The  Canadian  Banking  System,  1817-1890 

The  legislature  of  Upper  Canada  met  in  extraordi 
nary  session  the  19th  June.  Its  business  was  with 
the  financial  and  commercial  difficulties  that  dis 
tressed  the  province.  The  Lieutenant-Governor,  Sir 
Francis  Bond  Head,  opened  the  session  by  an  eloquent 
speech,  in  which,  quite  naturally,  he  discussed  the 
drain  of  specie  suffered  by  the  banks,  and  their,  as 
yet,  undoubted  solvency.  Sir  Francis  himself  opposed 
a  suspension  of  specie  payments  while  the  coffers  of 
the  banks  were  still  full  of  coin;  first,  as  impolitic, 
imperilling  the  confidence  of  the  British  public,  whose 
wealth  the  colony  needed;  and  secondly,  as  dishonor 
able,  involving  breach  of  faith  with  the  public  credi 
tors.  He  put  the  alternatives  squarely,  fraud  or 
honor,  suspension  with  full  or  with  empty  specie 
chests,  and  then  urged  the  legislature,  "like  Britons, 
to  be  true  and  just  in  all  their  dealings."  He  spoke 
in  vain.  The  Assembly  passed  a  bill  authorizing  the 
banks  forthwith  to  suspend  specie  payments.  As 
amended  in  important  details  by  the  Legislative 
Council,  passed  on  the  10th  and  approved  on  the  llth 
July,  the  measure  applied  only  to  the  chartered  banks 
and  the  four  excepted  private  banks.  Provided  the 
authority  to  suspend  was  first  obtained  from  the 
Governor-in-Council,  the  banks  were  relieved  from 
the  legal  incapacity  to  carry  on  banking  operations 
when  not  redeeming  notes  in  specie.  The  Lieutenant- 
Governor  might  impose  conditions  supplementary  to 
the  act  and  call  for  returns.  Actions  brought  against 
banks,  unless  to  liquidate  claims  or  otherwise  to  fur 
ther  justice,  were  suspended  during  the  term  of  the 
suspension  of  payments.  Courts  before  which  actions 
should  be  brought  might  stay  proceedings  on  the 
application  of  the  defendants  and  hearing  of  the 


Suspension  of  Specie  Payments  and  Crisis  0/1837     91 

parties.  Suspension  was  to  be  optional,  not  compul 
sory  upon  the  banks.  The  expiry  of  the  law  was 
fixed  for  the  end  of  the  then  next  session  of  Parlia 
ment.  During  this  period  no  suspended  bank  was  to 
issue  notes  in  excess  of  paid-in  capital  stock,  or  to 
dispose  of  its  specie  otherwise  than  in  paying  frac 
tional  parts  of  a  dollar,  or  in  redeeming  dollar  notes. 
(7  and  8  Wm.  IV,  cap.  2.) 

It  was  said  at  the  time  this  measure  was  being 
debated:  "  The  commercial  interests  of  the  country 
require  immediate  accommodation  of  the  banks,  and 
that  cannot  be  afforded  without  suspension  or  by 
giving  the  community  a  substitute  for  specie."1  In 
other  words,  it  was  feared  to  precipitate  the  mercan 
tile  bankruptcy,  which  refusal  of  the  usual  support 
of  bank  loans  was  likely  to  cause.  To  maintain 
redemption  the  banks  would  be  obliged  to  contract 
both  discounts  and  circulation.  To  maintain  pay 
ment  also  involved  for  them  the  losses  due  to  the  cost 
of  getting  specie.  And  aided  by  a  certain  fogginess 
of  provincial  ideas  upon  monetary  questions,  the 
combination  of  bank  and  borrowing  interests  carried 
the  bill  through.  The  sequel  shows  how  few  of  the 
anticipated  results  were  gained. 

The  Commercial  Bank  of  the  Midland  District  was 
the  only  chartered  bank  soon  to  avail  itself  of  the 
act.  Its  suspension  was  authorized  the  29th  Septem 
ber,  1837. -  The  Lieutenant-Governor  imposed,  with 
his  permission,  the  condition  that  notes  of  a  sus 
pended  bank  should  not  be  used  in  government  trans 
actions.  By  this  means  the  large  military  outlay, 
soon  to  occur,  was  prevented  from  being  an  instru- 

1  Journal,  U.  C.,  1837,  Appendix,  p.  26,  Evidence  of  Mr.  Proudfoot. 
2 Upper  Canada  Gazette,  vol.  xii,  no.  21. 


92  The  Canadian  Banking  System,  1817-1890 

ment  for  the  inflation  of  an  inconvertible  currency. 
The  Agricultural  Bank  practically  suspended,  and  in 
November,  1837.  failed  utterly.  Its  partners  decamped. 
Green  was  arrested  in  Buffalo.  Truscott  sailed  for 
Europe  "to  negotiate  the  American  securities  of  the 
bank."  The  precious  pair  left  behind  them  about 
£20,000  of  notes  utterly  unprovided  for,  and  claims 
of  depositors  for  over  £18,000,  against  which  but 
£7,000  of  commercial  paper  could  be  found.1  The 
Farmers'  Bank  suspended  for  only  two  months  at  the 
close  of  1837;  the  Bank  of  the  People  not  at  all  in 
that  year. 

The  Bank  of  Upper  Canada  much  desired  to  sus 
pend,  and  the  cashier,  Thomas  G.  Ridout,  rather 
pressed  their  wishes  upon  the  Lieutenant-Governor. 
Wearied  and  impatient,  Sir  Francis  summarily  closed 
the  discussion  by  exclaiming,  "  Sir,  the  principle  of 
monarchy  is  honour!  The  Bank  of  Upper  Canada  is 
the  Government  Bank.  To  maintain  its  honour  the 
bank  must  redeem  in  specie  !  "  And  until  the  5th 
March,  1838,  it  continued  so  to  redeem,  in  spite  of 
the  reduction  of  circulation  from  £212,000  in  May  to 
£80,000  in  December.2  The  Gore  Bank  stood  with 
the  government  institution. 

The  situation  in  Lower  Canada  was  complicated 
by  the  appearance  of  armed  insurrection  on  the  17th 
November.  The  trouble  was  not  wholly  unexpected. 
Before  the  close  of  navigation  the  banks  at  Montreal 
had  transferred  their  specie  to  Quebec,  and;  like  the 
Quebec  Bank,  deposited  it  for  safe  keeping  in  the 
citadel.  Activities  not  connected  with  the  hostilities 

Journal,  U.  C.,  1837-38,  Appendix,  p.  212  et  seq. 

-For  the  figures  the  reader  is  referred  to  Journal,  U,  C.,  1839, 
Appendix,  vol.  II,  part  ii,  p.  (>07  ct  seq.  For  the  incident  related 
the  authority  is  unquestionable,  but  I  am  not  at  liberty  to  cite  it. 


Suspension  of  Specie  Payments  and  Crisis  of  1837     93 

were  pretty  much  suspended  while  the  latter  endured. 
But  the  last  party  of  rebels  surrendered  the  loth 
December,  and  on  the  26th  February,  1838,  though 
the  military  were  still  on  the  alert,  a  public  thanks 
giving  for  the  restoration  of  order  was  held."1  The 
large  expenditures  of  specie  made  by  the  British 
commissariat  were  of  material  assistance  at  this  crisis, 
and  made  the  resumption  of  specie  payments  on  the 
23d  June,  1838,  comparatively  easy  for  the  Lower 
Canada  banks.2 

On  the  4th  December,  1837,  the  first  movements  of  a 
similar  rebellion,  partly  sympathetic  and  partly  inde 
pendent,  occurred  near  Toronto  (formerly  York),  the 
capital  of  the  Upper  Province.  In  this  case,  however, 
the  insurgents  were  chiefly  Reformers  of  Anglo-Saxon 
blood,  instead  of  disaffected  French.  Within  ten 
days  the  main  force  of  rebels  at  Toronto,  and  the 
other  party  near  London,  had  submitted  to  the  gov 
ernment  or  fled  the  country.  Peace  was  again  broken 
by  the  so-called  American  invasion,  beginning  the 
13th,  the  capture  of  Navy  island  in  the  Niagara  river, 
and  the  bombardment  of  Chippewa,  a  town  on  the 
Canadian  shore.  Then  the  steamer  "Caroline''  was 
destroyed  by  the  Canadian  militia,  and  the  invaders 
defied  the  authorities  on  either  side  of  the  line.3  To 
quell  the  present  and  prevent  future  disturbance  it 
was  now  necessary  to  quarter  a  considerable  force  of 
troops  in  the  Upper  Province.  The  Commissary-Gen 
eral  was  unable,  however,  to  meet  the  large  outlay 
of  money  which  this  required.  By  December,  the 

Robert  Christie,  "History  of  Lower  Canada,"  vol.  iv,  p.  448  et  seq. 

2 Journal,  Can.,  1859,  Appendix  no.  <i7,  p.  17,  Evidence  of  the 
Bank  of  Montreal. 

3Journal,U.  C.,  1837-38,  p.  35,  Despatch  of  F.  B.  Head,  Lieutenant- 
Governor,  to  H.  S.  Fox,  British  Minister  at  Washington. 


94  The  Canadian  Banking  System,  1817-1890 

Bank  of  Upper  Canada  had  accumulated  £140,000  in 
specie.  It  advanced  £50,000  to  the  government  in 
dollars,  and  offered  to  furnish  the  money  for  military 
disbursements  in  all  parts  of  the  province  where  posts 
were  established.  In  the  first  quarter  of  1838,  it  did 
advance  some  £219,000  on  treasury  bills  on  London. 
The  bank's  circulation  rose  to  £154,000,  its  specie  fell 
to  £60,000.  The  suspended  banks  took  advantage  of 
the  large  issues,  collected  the  notes  for  redemption, 
and  refused  their  own  in  exchange.  The  disturbed 
state  of  the  American  frontier  made  the  import  of 
specie  from  New  York  impracticable.  To  supply  the 
whole  country  with  specie  was  something  that  the  Com 
missary-General  and  bank  combined  could  scarcely 
undertake.  On  the  5th  March,  1838,  the  Bank  of  Upper 
Canada  applied  for  authority  to  suspend.  The  per 
mission  was  granted  immediately.1  The  suspension 
of  the  Gore  Bank  was  authorized  on  the  10th  of 
March. 

On  the  6th  March,  also,  was  approved  an  act  (1 
Vic.,  cap.  22,  U.  C.)  extending  the  limit  of  note  issues 
during  the  suspension  to  twice  the  paid-in  capital  of 
the  suspended  banks.  The  clause  which  forbade  the 
banks  to  dispose  of  their  specie  was  repealed. 

Owing  to  the  opposition  of  the  Bank  of  Upper 
Canada,  none  of  the  banks  in  that  province  joined  in 
the  general  resumption  by  the  banks  of  the  United 
States  and  Lower  Canada  in  June,  1838. 2  The 
Lower  Canada  chartered  banks  did  not  long  continue 

Journal,  U.  C.,  1839,  Appendix,  vol.  II,  part  ii,  p.  607  et  seq., 
Correspondence  on  the  subject  of  the  suspension  of  specie  payments; 
also  Upper  Canada  Gazette,  vol.  xii,  no.  45. 

2lbid,  Letter  of  the  Bank  of  Montreal.  Vide  Ordinances  of  the 
Special  Council,  L.  C.,  1838,  p.  142,  for  the  law  respecting  suspension 
and  resumption. 


Suspension  of  Specie  Payments  and  Crisis  0/1837     95 

a  specie  redemption.  A  second  insurrection  in  the 
following  November  obliged  them  again  to  suspend, 
the  suspension  being  authorized  and  facilitated  by 
an  ordinance  of  the  Special  Council  passed  the  5th 
November.1  Circulation  during  the  suspension  was 
limited  to  the  paid-in  capital  stock,  and  the  banks 
were  obliged  to  retain  the  specie  held  by  them,  and 
not  to  sell  it,  except  to  the  government.  The  ordi 
nance  applied  also  to  the  Bank  of  British  North 
America  and  La  Banque  du  Peuple.  During  the 
authorized  suspension,  bank  notes  became  a  legal 
tender  in  stay  of  proceedings  at  law. 

On  the  17th  July,  1838,  the  new  Lieutenant- Governor 
of  Upper  Canada,  Sir  George  Arthur,  intimated  to  the 
banks  of  the  province  the  peculiar  interest  taken  by 
Her  Majesty's  Government  in  the  state  of  the  cur 
rency  in  all  parts  of  the  empire,  and  urged  upon  them 
the  propriety  of  again  paying  in  specie.  Exchange 
was  low,  the  country  quiet,  and  much  specie  had  been 
imported  for  the  use  of  the  government.  The  times 
were  propitious,  and  he  tried  to  arrange  an  early  and 
simultaneous  resumption  by  all  the  banks.2  The  Gore 
Bank  was  willing  to  enter  into  communication  with 
the  other  banks,  with  a  sincere  wish  to  give  effect  to 
the  plan.  The  Commercial  Bank  was  prepared  to 
resume  as  soon  as  the  other  institutions  named  a  day 
for  the  purpose,  so  that  a  simultaneous  resumption 
should  occur.3  The  Bank  of  Upper  Canada  replied 
in  a  long  letter,  dwelling"  on  the  public  inconvenience 
and  distress  which  it  feared  would  attend  a  resump 
tion.  The  bank  tried  to  throw  the  responsibility  of 

1  Ordinances  of  the  Administrator  of  the  Government  and  Special 
Council,  L.  C.,  1838,  p.  10,  2  Vic.,  cap.  i. 

2 Journal,  U.  C.,  1839,  Appendix,  vol.  II,  part  ii,  p.  609,  Circular 
of  Sir  George  Arthur. 

AIbid,  p.  614. 


96  The  Canadian  Banking  System,  1817-1890 

the  postponement  upon  the  Commercial  Bank,  and 
then  counselled  waiting  until  the  heavy  crop  of  wheat 
had  been  harvested  and  brought  to  market.  But  when 
that  time  arrived  there  was  increased  hostility  on  the 
American  frontier.  Specie  could  not  be  imported 
safely,  and  Sir  George  forbore  to  urge  resumption. 
In  May,  1839,  the  Bank  of  Upper  Canada  again 
opposed  resumption  with  the  Lower  Canada  banks. 
The  renewal  of  the  stay  law  was  secured  to  the  1st 
November,  1839.  (2  Vic.,  cap.  13,  U.  C.)  Then  the 
bank  practically  refused  to  resume  until  the  statutory 
authority  for  suspension  had  expired.  The  Lieuten- 
ant-Governor  could  exercise  no  coercion  under  the 
law,  and  the  advantage  of  the  government  deposits 
enjoyed  by  the  Bank  of  Upper  Canada  compelled  the 
other  banks  to  follow  in  its  wake.1 

Aided  once  more  by  the  expenditures  for  military 
purposes,  and  with  no  practical  injury  or  check  to 
trade,  the  banks  of  Lower  Canada  resumed  specie 
payments  on  the  1st  June,  1839;  those  of  the  Upper 
Province,  the  law  having  expired,  on  the  1st  Novem 
ber  of  the  same  year. 


§15. EFFECTS    OF    THE    CRISIS    AND    SUSPENSION 

According  to  instructions  from  Downing  street,2 
the  Upper  Canada  act  continuing  the  stay  law  had 
forbidden  the  payment  of  dividends  during  the  sus 
pension.  But  as  this  endured  for  only  six  months, 
the  regular  distribution  of  profits  was  little  interfered 
with.  The  affairs  of  the  banks  in  both  provinces  were 

Ordinances  of  the  Administrator  of  the  Government  and  Special 
Council,  L.  C.,  1838,  p.  619. 

^Journal,  U.  C.,  1839,  Appendix,  p.  609. 


Effects  of  the  Crisis  and  Suspension  97 

conducted  with  great  caution  and  prudence.  Partly 
for  this  reason,  partly  because  of  the  depression  in 
Canadian  export  trades  which  followed  the  crisis  of 
1837  in  Great  Britain  and  the  United  States,  the  bank 
profits  during  the  suspension  were  not  excessive.  Fol 
lowing  are  the  rates  of  the  dividends  declared  by  four 
of  the  banks  between  1832  and  1840 11 

1833  1833         1834         1835         1836        1837       1838     1839     184° 

BANKS.       per  cent. 

Montreal....  7*5  8&6  8*6      8*6      8*4  8      6*16     7      6 

Quebec 6  6  4|       8          6      7 

Upper  Can.    8*18         8  88*4         8  8         8          88 

Commercial    4  8  8  8  77*648 

The  Bank  of  Montreal  therefore  distributed  54  per 
cent,  on  its  capital  in  the  four  years  preceding  sus 
pension,  and  43  per  cent,  in  the  four  years  including 
it  (1837-1840.)  But  the  latter  figure  should  be  dimin 
ished  by  the  16  per  cent,  premium  on  new  stock  paid 
to  the  old  shareholders  in  1838.  The  Bank  of  Upper 
Canada  divided  36  per  cent,  in  the  earlier,  32  per 
cent,  in  the  later  period;  the  Commercial  28  and  32 
per  cent.  From  the  last,  however,  must  be  deducted 
6  per  cent,  premium  paid  for  new  stock  to  the  origi 
nal  proprietors,  and  some  amount  to  represent  the 
cost  of  starting  the  bank  in  1832  and  1833.  The 
Quebec  Bank,  through  exceptional  causes,  passed  its 
dividends  in  1834-36,  and  is  not  properly  included  in 
the  exhibit.  The  capital  of  the  Bank  of  Montreal, 
£250,000  in  1837,  was  increased  to  £483,689  in  1840: 
that  of  the  Commercial  Bank  from  £100,000  in  1835 
to  nearly  £200,000  in  1838.  It  has  been  said  that,  as 
a  rule,  suspensions  of  specie  payments  are  highly 
profitable  to  banks  of  issue.  And  yet  our  corrected 
comparison  between  a  period  of  specie  payments  and 

1  Journal,  Can.,  1859,  Appendix  no.  67. 

7 


98  The  Canadian  Banking  System,  1817-1890 

one  chiefly  of  suspension,  affords  no  proof  of  the 
principle  in  point  either  of  aggregate  profits  of  the 
banks,  or  the  ratio  of  their  earnings  to  capital.  One 
cause  of  the  exception  was  doubtless  the  cautious 
management  of  the  banks;  other  and  more  explicit 
reasons  appear  to  have  been  the  restraints  imposed 
upon  the  banks  by  law,  by  circumstances,  and  by  their 
own  mutual  competition. 

The  legal  restraints,  such  as  prohibition  of  the  use 
of  inconvertible  notes  in  government  transactions 
and  the  limitation  of  issues,  are  already  familiar. 
The  second  group  must  be  discussed  in  connection 
with  the  benefits  derived  by  the  public  from  the  sus 
pension.  Properly  to  estimate  these  will  be  difficult, 
for  they  are  mixed  with  evils,  misfortunes  and  loss 
brought  by  reaction  from  the  fever  of  speculation. 

The  political  situation  in  Lower  Canada  had  des 
troyed  confidence  in  the  security  of  property,  depre 
ciated  its  value  and  arrested  the  improvement  and 
settlement  of  the  country.  Landed  property  had 
declined  to  an  alarming  extent.  In  the  first  year 
succeeding  the  crisis  the  timber  trade  had  suffered 
little,  but  the  province,  instead  of  exporting,  was 
obliged  to  import  grain.  The  number  of  immigrants 
arriving  at  Quebec,  no  less  than  52,000  in  1832,  fell 
to  5,000  in  1838.  This  loss  also  checked  the  advance 
of  the  province  l  Upper  Canada  had  experienced 
similar  insecurity  and  depreciation.  By  August, 
1838,  goods,  chattels,  lands  or  houses  would  not  bring 
at  forced  sale  a  third  of  the  former  prices,  confidence 
was  sadly  lacking  in  trade,  thousands  of  settlers 
were  leaving  the  province.  The  inconvertibility  of 

1Lord  Durham's  Report,  p.  21. 


.Effects  of  the  Crisis  and  Suspension  99 

property  left  debtors  without  the  means  of  meeting 
their  engagements,  and  liabilities  comparatively  trifl 
ing  were  often  found  sufficient  to  ruin  those  who  had 
justly  thought  themselves  opulent.  The  ordinary 
influx  of  immigration  and  British  capital  had  been 
suspended,  and  work  on  public  improvements 
stopped.1 

In  the  opinion  of  one  bank  "the  suspension  enabled 
the  Canadian  banks  to  afford  requisite  facilities  to 
customers  and  the  public.  This  could  not  have  been 
done  had  specie  payment  been  compulsory."  But 
all  the  banks  were  burdened  by  many  debts  overdue, 
the  result  of  the  liberal  discounts  that  preceded  the 
crisis  being  locked  up,  in  part,  in  long  speculations 
by  the  borrowers.3  The  Bank  of  Montreal  wrote  that 
"to  a  considerable  extent  banking  facilities,  by  a 
forced  system  of  renewals,  were  confined  to  the  class 
chiefly  indebted  to  the  banks  at  the  time  of  suspen 
sion."4  Similar  testimony  was  given  by  the  other 
banks.  And  when  the  law  was  about  to  expire  the 
cashier  of  the  Bank  of  the  People  (afterwards,  as  Sir 
Francis  Hincks,  Finance  Minister  of  the  Dominion) 
acknowledged  before  a  committee  of  the  Assembly 
that  the  suspension  had  not  enabled  the  banks  to 
extend  their  accommodation.5 

In  one  case,  at  least,  the  contrary  result  occurred. 
The  Bank  of  Upper  Canada  had  the  government  de- 
journal  TJ.  C.,  1839,  Appendix,  vol.  II,  part  ii,  p.  544. 
2 Journal,  Can.,  1859,  Appendix  no.  07,  Replies  to  Question  17. 
3Journal,  U.  C.,  1837-38,  Appendix,  p.  212  et  seq. 
4 Journal,  Can.,  1859,  ut  supra. 

5 Journal,  U.  C.,  1839,  vol.  IE,  part  ii,  page  770.  Cf.  also  p.  763, 
Evidence  of  Mr.  Proudfoot,  President  of  the  Bank  of  Upper  Can 
ada. 


100  The  Canadian  Banking  System,  18]  7-1890 

posits,  was  the  medium  of  the  government's  disburse 
ments,  was  under  large  advances  to  the  province, 
and  dealt  largely  in  government  exchange  on  Lon 
don.  It  acted,  therefore,  rather  as  an  organ  of  finan 
cial  administration  than  as  an  institution  for  the 
assistance  of  agriculture  and  commerce.  In  1837,  its 
profits  on  sterling  exchange  exceeded  the  whole,  in 
1838  the  half,  of  its  declared  dividends.  The  board 
of  directors  stopped  discounting  at  the  offices,  and 
compelled  all  dealing  to  be  done  directly  with  the 
head  office.  Their  refusals  of  discount  accommodation 
caused  merchants  and  others  accustomed  to  depend 
upon  it  not  only  great  inconvenience,  but  also  serious 
injury.1  From  the  weight  of  evidence  we  are  obliged 
to  conclude  that  the  Canadian  public  did  not  derive 
additional  benefits  in  the  way  of  discounts  from  the 
suspension  of  specie  payments.  The  reports  of 
amounts  discounted  each  month  before,  after  and 
during  the  suspension,  show  that  in  both  provinces 
the  average  of  amounts  discounted  each  month  was 
considerably  less  during  the  suspension,  than  either 
before  or  after  it.2 

'Journal,  U.  C.,  1839,  vol.  II,  part  ii,  p.  619  et  seq.,  Letter  from 
the  Bank  of  Montreal. 

2The  following  tables,  compiled  from  the  Committee  Reports  of 
1837,  1837-38,  1841  and  1859,  comprise  the  available  statistics  on  this 
point: 


Effects  of  the  Crisis  and  Suspension 


101 


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102  The  Canadian  Banking  System,  1817-1890 

It  will  be  remembered  that  the  Commercial  Bank 
and  Gore  Bank  were  calling  up  their  stock  in  this 
period,  and  so  do  not  show  in  their  return  the  un 
mixed  effects  of  the  suspension.  The  Montreal  Bank, 
also,  was  calling  up  added  stock.  Its  figures,  there 
fore,  furnish  specially  strong  confirmation  of  the 
conclusion  in  the  text,  for  even  with  its  means  thus 
increased,  its  discounts  were  less. 

The  fact  is,  the  banks  were  compelled  by  circum 
stances  to  redeem  their  liabilities  in  foreign  exchange. 
For  a  short  time  the  Bank  of  Upper  Canada  refused 
to  give  anything  for  its  notes.  But  after  causing 
great  inconvenience  it  gave  up  the  experiment.1 
Complete  suspension  would  have  been  ruinous.  This 
the  banks  appreciated.  Redemption  in  exchange 
was  still  redemption,  and  the  need  to  maintain  it,  as 
well  as  its  maintenance,  checked  excessive  issue  of 
notes,  and  compelled  the  usual  care  to  loan,  not  only 
safely,  but  so  that  new  credits  should  be  speedily 
available  and  well  in  hand.  But  in  redeeming  by 
exchange  there  was  an  opportunity  to  exploit  the 
public  in  charges  for  premium  that  the  banks  some 
times  improved.2  In  this  respect  the  effects  of  the 
suspension  were,  instead  of  benefits,  only  added  ex 
pense  to  the  public,  while  the  banks  were  able  to 
recoup  themselves  for  some  of  the  losses  incurred  in 
the  crisis. 

The  highest  rate  in  suspended  bank  paper  for 
sterling  exchange,  was  reached  in  Montreal  in  July, 
1837,  viz.,  122^.  Toward  the  end  of  the  month  it 
reached  123  in  Toronto,  par  being  109. 59. 3  At  the 

1  Journal,  U.  C.,  1839,  vol.  II,  part  ii,  p.  770. 
-Ibid. 

'Journal,  U.  C.,  1837-38,  Appendix,  3d  Report  of  the  Select  Com 
mittee  on  Finance,  p.  96. 


Effects  of  the  Crisis  and  Suspension  103 

same  dates  the  Bank  of  Upper  Canada  was  selling 
bills  on  London  for  115  to  116  in  specie.  This  depre 
ciation  of  inconvertible  bank  notes  continued  through 
1837,  the  rate  averaging  6^  to  7-J  per  cent.,  but  in 
August  touching  10  per  cent/ 

The  depreciation  fell  in  January,  1838,  to  2  per 
cent,  or  less.  But  goods  and  produce  could  usually 
be  bought  on  equal  terms  with  either  the  notes  of  a 
specie  paying  or  a  non-specie  paying  bank.1  In  Au 
gust  the  banks  in  Upper  Canada  were  redeeming 
their  notes  in  any  amount  by  bills  of  exchange  on 
London  and  New  York,  and  within  1  per  cent,  of  the 
rate  at  Montreal  (then  on  a  specie  basis).2  The  Com 
mercial  Bank  afterwards  made  a  practice  of  redeem 
ing  for  its  customers  only.  A  curious  but  profitable 
business  was  carried  on  in  Lower  Canada  on  the 
basis  of  the  2  per  cent,  discount  on  the  inconvertible 
Upper  Canada  notes  circulating  in  the  province.  The 
Bank  of  the  People  was  somewhat  weakened  after 
the  defeat  of  the  insurgent  section  of  the  Reform 
party.  Some  time  in  1838  it  was  sold  to  the  Bank  of 
Montreal,  who,  though  empowered  by  the  province 
in  1837  to  collect  debts  due  them,  notwithstanding 
the  expiry  of  their  charter,  were  legally  incapable  of 
establishing  an  office  of  their  own  in  Upper  Canada. 
They  worked  under  the  name  of  the  Bank  of  the 

Journal,  U.  C.,  1837-38,  Appendix,  p.  96,  3rd  Report  of  the  Select 
Committee  on  Finance. 

2 Journal,  U.  C.,  1839,  Appendix,  vol.  II.  part  ii,  p.  Oil,  Letter  of 
the  Bank  of  Upper  Canada. 

3The  accompanying  table  of  rates  of  premium  on  sterling  exchange 
will  illustrate  the  degrees  of  depreciation.  Up  to  March,  1838,  the 
quotations  of  the  Bank  of  Upper  Canada  furnish  the  specie  prices. 
Then  from  June  to  October,  inclusive,  1838,  and  from  June  to  Dec 
ember,  inclusive,  1839,  the  Bank  of  Montreal  provides  the  specie 
rate  of  sterling  exchange  upon  London.  The  depreciation  is 
approximately  expressed  by  the  difference  between  the  higher  and 


104  The  Canadian  Banking  System,  1817-1890 


People,  and  besides  the  usual  profits,  acquired  added 
gain  by  the  easy  process  of  buying  up  the  People's 
notes,  really  their  own,  at  the  discount  in  Lower 

the  specie  rate,  the  selling  rate  in  one  province  being  always  com 
pared  with  the  selling  rate  in  the  other,  or  the  buying  rate  with  the 
buying  rate. 


BANK  OF   MONTREAL. 

BANK  OF  UPPER 
.CANADA. 

Depreci 
ation 

Buying 
Premium 

Selling 
Premium 

Buying    ;     Selling 
Premium     Premium 

1837     January 

% 
11 

11 
12 
12 
13i 

16 
22 
20 
21 
13 
15 
12 
10 
81 
71 
61 
81 
10 
Hi 
Hi 
101 

101 

9f 
101 
91 
10 
9f 
91 
9 
8| 
9 
9 

81 
91 
8 
8 

% 
HI 
121 

121 
131 

% 

91 
10 
10 
10 
11 
13 
13 
12 
12 
10 
8 
8 
8 
8 
71 
71 
8 
10 
10 
101 

11 
11 
11 
11 
11 
11 
11 

10 
10 
10 
10 
10 
10 
101 
101 
101 

% 

121 
121 
121 
121 
121 

% 

'2i' 

3 

6-81 
61-8 
3-6 
3-51 

31-41 
51 
0-2^ 
0-1 

'•M 

11-21 
1-2 
1-2 
1-2 

'21' 

2*  , 

21 

21 

2 

February  
March  

April 

Mav 

«Tune 

.Tulv 

20-221 
221 
21-18 
18-151 
16-17 
18 

i5-m 

91-11 
81-9 
8-7 
71-81 
81-12 
11-12 
101-111 

lof-m 
101-111 

111-12 
12-124 
12 
11-12 
101-111 

101-11 

10 
10 
10 
101 

101 

12 
10 
10-11 

14 
16 
15 
121 
121 
121 
121 
HI 
HI 
121 
121 
121 
131 
121 
121 
121 
131 
14 
131 
13 
121 
121 
12i 
121 
121 
121 
121 
121 
11 
121 

Aujrust 

September  .  .  . 
October  
November  .  .  . 
December  
1838  —  January  

February  
March  

April 

May  

June  

July  

August 

September  .  .  . 
October       .  .  . 

November..  .  . 
December.  .  .  . 
1839  —  January  

February  
March  
April  

May 

June 

July  

August 

September  .  .  . 
October       .  .  . 

November  .  .  . 
December  .  .  . 

Effects  of  the  Crisis  and  Suspension  105 

Canada,  and   remitting  them  to  the  Upper  Province 
for  re-issue. 

The  restraint  imposed  by  the  mutual  competition 
of  the  banks  was  exercised  through  the  weekly  ex 
changes  carried  on  between  them.  Now  a  regular 
redemption  effectively  prevents  inflation  of  a  bank 
note  currency,  and  imposes  upon  the  participating 
banks,  if  they  are  to  continue  in  existence,  the  neces 
sity  of  prudence  in  their  conduct.  The  experience  of 
New  England  with  the  Suffolk  banking  system  has 
proved  this  and  proved  it  for  all  time.  The  power  to 
refuse  at  the  counter  the  notes  of  a  suspended  bank 
was  a  power  of  coercion.  The  Bank  of  Upper 
Canada  employed  it  to  enforce  the  settlement  of  the 
weekly  balances  in  exchange.  In  Lower  Canada, 
also,  the  specie  payment  of  balances  could  not  be 
exacted,  and  notes  could  not  be  received  because  they 
were  not  redeemable.  But  redemption  was  obtained 
notwithstanding.  The  debtor  banks  were  forced  to 
hand  over  in  settlement  some  of  their  best  discounted 
paper.  And  these  notes  were  redeemed  in  due  time 
by  the  makers,  leading  export  merchants,  by  sterling 
bills  drawn  against  shipments  of  grain,  potash, 
ginseng  and  timber. 

The  good  effects  of  their  careful  policy,  and  the 
restraints  imposed  by  law,  by  circumstances  and  by 
their  mutual  competition,  were  evident  in  the  strength 
and  stability  of  the  banks,  as  well  in  the  depression 
that  followed  the  crisis  as  in  the  revival  of  commerce 
and  agriculture  that  finally  came.  The  four  factors 
have  served  now  to  explain  the  moderate  dividends 
paid  during  the  suspension,  because  in  1837,  1838 
and  1839  they  served  to  prevent  an  immoderate 
expansion.  With  this  in  their  favor  the  banks  found 
the  resumption  comparatively  easy,  the  country, 
innocuous. 


106  The  Canadian  Banking  System,  1817-1890 

§16. INCIDENTAL    DETAILS 

The  government  of  Upper  Canada  was  in  far  worse 
straits  during  the  suspension  than  the  banks.  It  was 
reduced  to  the  negotiation  of  its  debentures  through 
the  local  banks,  who  remitted  the  securities  to  various 
English  houses,  and  drew  sterling  exchange  against 
them.  The  proceeding  provoked  the  protests  of  the 
Barings,  across  whose  counters  the  interest  was  pay 
able,  and  who  objected,  as  they  wrote,  to  "having 
our  names  inscribed  on  stock,  the  issue  of  which  had 
not  our  previous  knowledge  and  consent."  Various 
proposals  to  issue  inconvertible  notes  for  circulation 
on  the  credit  of  the  government  were  defeated  in 
1837  and  1838.  In  reply  to  Sir  George  Arthur's  letter 
of  the  20th  November,  1838,  Lord  Glenelg  advised 
him  that  it  was  impossible  to  grant  him  provisional 
authority  to  give  the  royal  assent  to  an  enactment 
permitting  the  issue  of  such  notes,  even  though  the 
proceeds  were  intended  for  public  works  or  local  im 
provements.2  The  second  financial  measure  of  1839, 
however,  was  an  act  authorizing  the  issue  of  Trea 
sury  notes  for  £1  each  to  the  amount  of  £250,000  stg. 
Concerning  this  act  Lord  John  Russell  wrote  to  the 
Governor- General:  "Her  Majesty  cannot  be  advised 
to  confirm  it.  The  issue  of  such  an  amount  of  small, 
inconvertible  currency,  as  a  resource  for  sustaining 
the  public  credit,  is  not  to  be  justified  even  by  the 
present  exigency  of  affairs.  *  *  * 

"It  is  of  great  importance  that  the  scheme  devised 
to  meet  the  pressure  of  the  passing  day  should  not 
be  such  as  to  preclude  the  early  return  to  a  more 
salutary  course  of  financial  operations." 

1  Journal,  U.  C.,  1839,  Appendix,  vol.  II,  part  ii,  p.  547. 
2 Ibid,  p.  553,  Letter  of  the  31st  January,  1839. 
3 Journal,  Can.,  1841,  p.  395. 


Incidental  Details  107 

It  had  been  necessary,  some  time  previously,  to 
authorize  the  Receiver  General  to  secure  a  loan  on  the 
government's  stock  in  the  Bank  of  Upper  Canada. 
(1  Vic.,  cap.  1,  U.  C.,  assented  to  6th  March,  1838.) 
In  1840  the  act  was  repealed  and  the  Receiver  Gen 
eral  authorized  to  sell  the  stock,  with  the  sanction  of 
the  Governor-in-Council.  Since  1822,  the  province 
had  received  in  dividends  and  bonuses  £38,315  on  its 
subscription  to  2,000  shares  of  the  par  value  of 
£25,000.!  It  received  in  1840,  £25,250  for  its  stock.2 
The  authority  of  the  Lieutenant-Governor  annually 
to  nominate  four  of  the  fifteen  directors  was  repealed, 
and  the  Bank  of  Upper  Canada  lost,  in  law,  its 
official  connection  with  the  government. 

This  was  one  of  the  measures  preparatory  to  the 
Union  of  the  Canadas,  the  constitutional  change 
which,  since  the  restoration  of  peace,  had  been 
undertaken  as  the  plan  most  likely  "to  relieve  the 
financial  embarrassments  of  Upper  Canada,  to  enable 
her  to  complete  her  public  works,  to  enable  her  to 
develop  her  agricultural  capabilities,  to  restore  con 
stitutional  government  to  Lower  Canada,  to  establish 
a  firm,  impartial  and  vigorous  government  for  both, 
and  to  unite  the  people,  within  that  one  common  feel 
ing  of  attachment,  to  British  institutions  and  British 
connection."3  On  the  fifth  of  February,  1841,  the  dis 
appearance  of  the  Upper  and  Lower  Provinces,  the 
birth  of  a  new  Province  of  Canada,  the  creation  of  a 
common  legislature  and  the  completion  of  the  political 

Journal,  Can.,  1841,  Appendix  0. 
2 Ibid t  Appendix  B. 

'Journal,  U.  C.,  1839-40,  p.  17,  Message  of  His  Excellency  the 
Governor-General,  dated  the  7th  December,  1839. 


108  The  Canadian  Banking  System,  1817-1890 

revolution  known  as  ' 'responsible  government"  were 
proclaimed  by  the  Governor-General  to  take  effect 
upon  the  tenth.  In  the  next  chapter  we  shall  discuss 
the  course  of  banking  and  banking  legislation  in  the 
new  province  down  to  1850. 


CHAPTER  IV 
PROVINCE  OF  CANADA,  1841-1850 

§17. THE  BANK  OF  ISSUE  PROPOSED  BY  LORD  SYDEN- 

HAM 

AMONG  the  questions  which  came  before  the  first 
Parliament  of  the  province  of  Canada  were  provi 
sion  for  the  general  revenue  and  for  the  completion 
and  extension  of  the  public  works.  The  Governor- 
General,  Lord  Sydenham  (Charles  Poulett  Thomp 
son),  was  a  friend  of  Mr.  Samuel  Jones  Loyd  (Lord 
Overstone),  and  had  shared  his  theories  upon  cur 
rencies  and  their  regulation.1  The  eminence  and 
influence  of  the  author,  and  the  connection  of  the 
effort  with  the  movement  which,  in  England,  culmi 
nated  in  PeePs  Bank  Act  of  1844,  demand  that  the 
financial  and  monetary  expedient  devised  at  this 
juncture  by  Lord  Sydenham  should  receive  explana 
tion  in  some  detail. 

With  the  professed  objects  of  obtaining  (a)  a  paper 
currency  perfectly  secure  of  convertibility  into  the 
value  it  represented,  and  free  from  injurious  fluctua 
tions;  (b)  the  whole  profit  of  the  issue  for  the  bene 
fit  of  the  state  (some  £30,000  to  £35,000  yearly,  and 
capable  of  increasing  to  double  or  treble  the  amount), 
(c)  not  less  than  £750,000  to  be  placed  at  the  dis 
posal  of  the  state  for  the  public  works;  he  suggested 

1  "Reminiscences  of  his  Public  Life,"  by  Sir  Francis  Hincks,  K. 
C.  M.  G.,  Montreal,  1884,  p.  69. 


110  The  Canadian  Banking  System,  1817-1890 

to  the  Select  Committee  on  Banking  and  Currency  a 
series  of  resolutions.1  In  them  was  outlined  the 
scheme  by  which  the  objects  were  to  be  attained,  viz.: 

(a)  the  establishment  of  a  Provincial  Bank  of  Issue 
under    three   commissioners,    who  should  be    vested 
with  the  sole  power  of  issuing  notes  payable  on  de 
mand; 

(b)  for  sums  of  $1  and  upwards  to  an  aggregate 
issue  of  £1,000,000  currency,   and  in  excess  of  that 
amount  only  to  redeem  notes  or  to  purchase  bullion 
or  coin; 

(c)  one-fourth  of   the   issue  to  be  against  bullion 
or  coin,  and  three-f  ourtlis  against  government  securi 
ties  purchased  by  the  bank  or  paid  into  it,  the  inter 
est  on  securities  to  be  used  for  management,  and  the 
balance  remaining  after  meeting  expenses  to  be  paid 
into  the  public  account; 

(d)  no   bank  to  issue   notes  after  the   1st   March, 
1843; 

(e)  2i   per  cent,   on   their   circulation    to    be    paid 
yearly  to  banks  with  charters  expiring  after  the  1st 
March,  1843,  for  the  term  of  their  charters;  should 
such  term  be  less  than  five  years  after  the  1st  March, 
1843,  then  for  ten  years; 

(/)  charters  expiring  before  the  1st  March,  1843, 
to  be  continued  with  the  power  of  issue  to  that  date, 
but  after  that  date  without  the  power  of  issue; 

(g)  the  Bank  of  Issue  not  to  discount,  receive  de 
posits  or  deal  in  exchange. 

In  the  message  of  the  20th  August,  1841,  Lord  Syd- 
enham  proposed  to  the  Legislative  Assembly  the 

1  "Memoir  of  the  Life  of  the  Right  Honorable  Charles,  Lord  Syd- 
enham,  with  a  narrative  of  his  administration  in  Canada,"  edited 
by  G.  Poulett  Sorope,  London,  1844,  p.  314. 


The  Bank  of  Issue  Proposed  by  Lord  Sydenham      111 

assumption  by  the  province  of  the  issue  of  notes 
payable  on  demand.  The  acquisition  "of  a  capital 
representing  a  revenue  of  not  less  than  £35,000"  is 
here  advanced  as  the  most  considerable  result  of  the 
plan.1  But  in  private  letters  the  noble  Lord  had  de 
scribed  his  purpose  as  "the  establishment  of  a  per 
fectly  sound  paper  currency  by  means  of  a  State  Bank 
of  Issue,  the  principle,  in  short,  for  which  I  contended 
in  the  Cabinet,  in  the  first  instance,  in  1833,  and 
which  Sam.  Loyd  has  since  so  ably  supported  in  a 
pamphlet.7'2  This  acknowledgment  forms  conclusive 
evidence  that  the  resolutions  of  1841  were  neither 
more  nor  less  than  a  plan  to  establish  in  Canada  the 
methods  of  note  regulation  advocated  by  the  British 
"Currency  School." 

Now  it  must  be  said  that  so  far  as  the  experience 
of  either  Upper  or  Lower  Canada  taught  anything, 
it  was  that  their  bank  note  currency  was  satis 
factory,  worked  well  and  was  safe.  The  freedom 
from  fluctuations  would  have  attracted  Canadians 
of  that  day  as  little  as  it  would  those  of  the  present. 
What  they  wanted,  what  in  fact  they  had,  was  a 
bank  note  currency  that  would  fluctuate  in  corres 
pondence  with  the  number  and  amount  of  transac 
tions  wherein  it  was  used.  Compared  to  this,  the 
rigidity  and  inelasticity  of  a  government  issue  were 
distinctly  objectionable.  The  promised  security  was 
merely  a  promise.  Government  currencies  had  hith 
erto  been  proposed  in  the  Canadas  only  when  the 
government  was  in  financial  straits.  For  the  cur 
rency  to  be  secure,  the  issuer,  either  of  the  notes  or 
of  the  security,  must  be  solvent.  The  banks  had 

1  Journal,  Can.,  1841,  p.  398. 
2Hincks,  ut  supra,  p.  59. 


112  The  Canadian  Banking  System,  1817-1890 

come  out  of  the  crisis  well  enough.  None  had 
defaulted  on  their  notes.  Never  had  a  chartered 
bank  failed  in  the  Canadas.  Never,  except  in  a  time 
of  war  and  commercial  disaster,  had  their  notes  fallen 
below  par  with  specie.  For  Upper  Canada,  at  least, 
it  was  acknowledged  that  by  completely  stopping 
discounts  for  a  time,  the  banks  need  not  have  sus 
pended  then. 

Notwithstanding,  the  committee,  the  chairman  of 
which,  Mr.  Francis  Hincks,  was  a  warm  advocate  of 
the  Governor-General's  views,  reported  to  the  Assem 
bly  in  favor  of  the  resolutions.  The  measure  there 
met  opposition.  It  involved  private  and  class  interests. 
It  attacked  the  chartered  banks,  who  were  strong  in 
the  Assembly.  They  fought  it  because  the  loss  of 
the  issue  privilege  would  lessen  their  profits,  force 
them  to  reduce  the  number  of  their  branches,  and 
diminish  the  loanable  credit  at  their  command.  It 
would  cause  distress  more  or  less  serious  to  their 
customers,  the  commercial  classes,  through  the  cur 
tailment  of  discount  accommodation  thus  rendered 
necessary.  Further,  it  was  feared  that  a  provincial 
bank  would  materially  increase  the  power  of  the 
executive.  The  effect  of  political  feeling  was  joined 
with  the  efforts  of  the  bank  interest.  Conservatives, 
French  Canadians  and  some  recalcitrant  Reformers,1 
united  in  committee  of  the  whole  house  to  pass  the 
resolution  of  the  31st  August,  "that  it  is  inexpedient 
to  take  into  further  consideration  during  the  present 
session  the  establishment  of  a  Provincial  Bank  of 
Issue,  or  the  issue,  in  any  way,  of  a  paper  currency 
on  the  faith  of  the  Province."' 

1  Hincks,  ut  supra,  p.  70. 
2 Journal,  Can.,  1841,  p.  464. 


The  Legislation  of  1841  and  1843  113 

As  a  fiscal  measure,  partly  in  lieu  of  the  defeated 
expedient,  the  legislature  that  session  decided  to  im 
pose  upon  the  bank  notes  issued  and  circulating  in 
the  province  a  duty  or  rate  of  one  per  cent,  per  annum. 
(4  &  o  Vic.,  cap.  29.)  The  tax  was  levied  on  the 
average  of  circulation  as  shown  by  statements  of  the 
notes  outstanding  at  the  end  of  each  month,  and  fur 
nished  to  the  Receiver  General  on  the  15th  May  and 
the  loth  November  of  each  year.  Those  making 
wilful,  false  statements,  were  liable  to  the  penalty 
for  perjury,  while  refusal  or  neglect  to  furnish  state 
ments  incurred  a  fine  of  £1,000.1 


§18. — THE    LEGISLATION    OF    1841    AND    1843 

In  their  final  report  (27th  August,  1841),  the  Select 
Committee  on  Banking  and  Currency  expressed  them 
selves  in  favor  of  adopting  some  uniform  system  of 
banking  in  the  province.  They  recommended,  there 
fore,  that  the  prayer  of  the  petitions  from  the  char 
tered  banks  of  the  province,  for  an  extension  of  their 
capitals,  should  be  complied  with  under  certain 
restrictions,  most  of  which  had  been  recommended 
in  a  despatch  from  H.M.  Principal  Secretary  of  State 
for  the  Colonies.2  This  despatch  was  the  circular  of 
the  4th  May,  1840,  issued  over  the  signature  of  Lord 
John  Russell,  with  the  expectation  that  provision  for 
the  observance  of  the  regulations  it  contained,  should 

:The  revenue  derived  from  the  rate  was  in  1841-42,  £9,560;  1842-43, 
£7,572;  1843-44,  £10,484;  1844-45,  £13,020;  1845  46,  £15,899;  1846-47, 
£16,066;  1847-48,  £12,473.  Return  to  an  Address  of  the  Honorable 
Legislative  Assembly,  dated  the  29th  January,  1849.  Journal,  Can., 
1849,  Appendix.  In  most  cases  the  duty  was  equivalent  to  a  net 
income  tax  of  7  to  8  per  cent. 

^Journal,  Can.,  1841,  Appendix  O. 
8 


114  The  Canadian  Banking  System,  1817-1890 

be  made  in  all  colonial  bank  charters.  Among  British 
North  American  documents,  the  Assembly  Journal 
of  New  Brunswick  is  the  only  one  to  contain  the 
original  circular.1  The  report  which  the  Canadian 
committee  based  upon  it  is  worthy  of  full  description 
here  as  the  first  group  of  principles  adopted  by  the 
province  as  the  form  for  its  banking  legislation. 
In  connection  with  the  circular  of  the  30th  May, 
1846,  the  regulations  of  1840  furnish  the  key  to  nearly 
the  whole  development  of  banking  law  in  British 
North  America,  from  the  date  of  their  publication  to 
the  period  of  Confederation.  Following  are  the 
restrictions  recommended  by  the  committee : 

1st.  The  amount  of  capital  of  the  company  to  be  fixed;  and  the 
whole  of  such  fixed  amount  to  be  subscribed  for  within  a  limited 
period,  not  greater  than  eighteen  months,  from  the  date  of  the 
charter  or  the  act  of  incorporation. 

2d.  The  bank  not  to  commence  business  until  the  whole  of  the 
capital  is  subscribed,  and  a  moiety  at  least  of  the  subscription  paid 
up. 

3d.  The  amount  of  the  capital  to  be  paid  up  within  a  given  time 
from  the  date  of  the  charter  or  act  of  incorporation,  such  period, 
unless  under  particular  circumstances,  to  be  not  more  than  two  years. 

4th.  The  debts  and  engagements  of  the  company,  on  promissory 
notes  or  otherwise,  not  to  exceed  at  any  time  thrice  the  amount  of 
the  paid-up  capital,  with  the  addition  of  the  amount  of  such  deposits 
as  may  be  made  with  the  company's  establishment  by  individuals, 
in  specie  or  government  paper. 

5th.  All  promissory  notes  of  the  company,  whether  issued  from 
the  principal  establishment  or  from  the  branch  banks,  to  bear  date 
at  the  place  of  issue,  and  to  be  payable  on  demand  in  specie  at  the 
place  of  date. 

6th.  Suspension  of  specie  payments  on  demand  at  any  of  the 
company's  establishments,  for  a  given  number  of  days  (not  in  any 
case  exceeding  sixty)  within  any  one  year,  either  consecutively  or 
at  intervals,  to  forfeit  the  charter. 

7th.  The  company  shall  not  hold  shares  in  its  own  stock,  nor 
make  advances  on  its  own  shares. 

Journal  of  the  House  of  Assembly  of  the  Province  of  New 
Brunswick,  1841,  p.  41. 


The  Legislation  of  1841  and  1843  115 

^th.  The  company  shall  not  advance  money  on  security  of  lands, 
or  houses,  or  ships,  or  on  pledge  of  merchandise,  nor  hold  lands  or 
houses,  except  for  the  transaction  of  its  business;  nor  own  ships  or 
be  engaged  in  trade,  except  as  dealers  in  bullion  or  bills  of  exchange; 
but  shall  confine  its  transactions  to  discounting  commercial  paper 
and  negotiable  securities,  and  other  legitimate  banking  business. 

9th.  The  dividends  of  the  shareholders  are  to  be  made  out  of 
profits  only,  and  not  out  of  the  capital  of  the  company. 

10th.  The  company  to  make  and  publish  periodical  statements  of 
its  assets  and  liabilities  (half-yearly  or  yearly),  showing  under  heads 
specified  in  the  annexed  form  the  average  of  the  amount  of  its  notes 
in  circulation  and  other  liabilities  at  the  termination  of  each  week  or 
month,  during  the  period  to  which  the  statement  refers,  and  the 
average  amount  of  specie  or  other  assets  that  were  available  to  meet 
the  same.  Copies  of  these  statements  are  to  be  submitted  to  the 
provincial  government,  and  the  company  shall  be  prepared,  if 
called  upon,  to  verify  such  statements  by  the  production,  as  confi 
dential  documents,  of  the  weekly  or  monthly  balance  sheets  from 
which  the  same  are  compiled.  And  also  to  be  prepared,  upon  requi 
sition  from  the  Lords  Commissioners  of  Her  Majesty's  Treasury, 
to  furnish  in  like  manner  such  further  information  respecting  the 
state  or  proceedings  of  its  banking  establishments  as  their  Lordships 
may  see  fit  to  call  for. 

llth.  No  by-law  of  the  company  shall  be  repugnant  to  the  condi 
tions  of  the  charter  or  act  of  incorporation  or  the  statutes  of  the 
province. 

12th.  *****  The  provisions  of  charters  or  acts  of  incor 
poration  should  be  confined  as  far  as  practicable  to  the  special 
powers  and  privileges  to  be  conferred  on  the  company,  arid  the 
conditions  to  be  observed  by  the  company,  and  to  such  general  reg 
ulations  relating  to  the  nomination  and  power  of  the  directors,  the 
institution  of  by-laws,  or  other  proceedings  of  the  company  as  may 
be  necessary,  with  a  view  to  public  convenience  and  security. 

13th.  No  company  shall  be  allowed  to  issue  promissory  notes  on 
demand  for  an  amount  greater  than  its  paid-up  capital. 

FORM  OF  RETURN 

Return  of  the  average  amount  of  the  Liabilities  and  Assets  of  the 
Bank  of  during  the  period  from  to 

Promissory  notes  in  circulation  not  bearing  interest.  £ 

Bills  of  exchange  in  circulation  not  bearing  interest .    — 

Bills  and  notes  in  circulation  bearing  interest - 

Balances  due  to  other  banks — 

Cash  deposits  not  bearing  interest — 

Cash  deposits  bearing  interest • 

Total  average  liabilities - 


116  The  Canadian  Banking  System,  1817-189Q 

Coin  and  bullion <£ —  • 

Landed  and  other  property  of  the  corporation - 

Government  securities 

Promissory  notes  or  bills  of  other  banks - 

Balances  due  from  other  banks 

Notes  and  bills  discounted  or  other  debts  due  to  the 
corporation   not    included    under    the    foregoing 

heads 

Total  average  assets 

The  second  general  law  enacted  in  the  province 
with  respect  to  banks  was  an  act  to  authorize  the 
banks  previously  chartered  by  acts  of  either  of  the 
late  provinces  to  carry  on  their  business  throughout 
the  new  province.  (4  and  5  Vic.,  cap.  99.)  The  con 
dition  was  that  notes  of  Upper  Canada  banks  issued 
in  Lower  Canada  should  bear  date  at  the  place  of 
issue,  and  be  payable  there  as  well  as  at  the  principal 
establishment  of  the  corporation. 

The  three  lower  Canada  banks  petitioned  in  1841 
for  the  renewal  of  their  charters  and  permission  to 
increase  their  capital  stocks.  Other  petitioners 
sought  incorporation  for  a  proposed  Bank  of  the 
Niagara  District.  The  acts  passed  in  answer  to  the 
several  prayers  embodied  all  the  provisions  and 
restrictions  laid  down  in  the  committee's  report,  con 
tinued  the  charters  and  extended  the  corporate 
powers  of  each  bank  to  the  whole  province.  The 
definition  of  the  powers  was  strict,  though  riot,  per 
haps,  too  severe  when  the  conditions  and  temptations 
in  which  the  banks  worked  are  considered,1  It  ..was 

irThe  clause  was  in  effect :  ''And  be  it  enacted  that  the  said  cor 
poration  hereby  constituted  shall  not  either  directly  or  indirectly 
hold  any  lands  or  tenements  (save  and  except  such  as  by  the  first 
section  of  this  act  they  are  specially  authorized  to  acquire  and  hold), 
or  any  ships  or  other  vessels,  or  any  share  or  shares  of  the  capital 
stock  of  the  corporation  or  of  any  bank  in  this  province;  nor  shall  the 


The  Legislation  of  1841  and  1843  117 

enacted  that  110  bank  officer  should  act  as  proxy, 
that  the  bank  should  not  hold  the  stock  of  other 
banks,  except  when  taken  for  bond  fide  debts  con 
tracted  in  the  usual  course  of  business,  and  that 
no  notes  under  five  shillings  should  be  issued.  It 
was  further  enacted  that  notes  under  £1  should 
not  exceed  one-fifth  of  the  paid-up  capital,  and  that 
the  total  circulation,  on  pain  of  charter  forfeiture 
and  the  joint  and  several  liability  of  the  directors, 
both  to  the  public  and  the  shareholders,  should  not 
exceed  the  capital  stock  paid  in.1  Branch  banks  were 
permitted  and  subjected  to  the  restrictions  as  to  note 
issue.2  A  considerable  holding  of  paid-up  stock  was 

said  corporation,  either  directly  or  indirectly,  lend  money  or  make 
advances  upon  the  security,  mortgage,  or  hypothecation  of  any 
lands  or  tenements,  or  of  any  ships  or  other  vessels,  nor  upon  the 
security  or  pledge  of  any  share  or  shares  of  the  said  corporation, 
or  of  any  goods,  wares  or  merchandise;  nor  shall  the  said  corpora 
tion,  either  directly  or  indirectly,  raise  loans  of  money  or  deal  in 
the  buying,  selling  or  bartering  of  goods,  wares  or  merchandise,  or 
engage  or  be  engaged  in  any  trade  whatever  except  as  dealers  in 
gold  and  silver  bullion,  bills  of  exchange,  discounting  promissory 
notes  and  negotiable  securities,  and  in  such  trade  generally  as  ap 
pertains  to  the  business  of  banking.  Provided  always,  that  the 
said  corporation  may  take  and  hold  hypotheques  and  mortgages  on 
real  estates  and  property  in  this  province,  by  way  of  additional  secu 
rity,  for  debts  contracted  to  the  corporation  in  the  course  of  their 
dealings." 

xThe  Bank  of  the  Niagara  District  was  permitted  to  issue  notes 
for  less  than  £1  to  i  of  paid-in  capital.  (4  and  5  Vic.,  cap.  96,  §  xiii.) 

2The  notes  of  the  Quebec  Bank  were  to  be  payable  at  the  place  of 
date  and  issue  as  well  as  at  the  head  office  of  the  bank.  In  1849 
this  provision  was  amended  to  conform  to  that  in  the  other  bank 
charters.  After  1842  the  greater  number  of  what  had  been,  tech 
nically,  offices  of  discount  and  deposit,  were  changed  into  branches, 
i.  e.,  banks  in  every  sense  of  the  term.  The  head  offices  ceased  to 
be  the  sole  places  of  date  and  issue,  but  notes  otherwise  issued  were 
payable  only  at  the  branch  where  they  were  dated  and  not  at  the 
principal  office. 


118  The  Canadian  Banking  System,  1817-1890 

continued  as  a  qualification  for  the  directorate. 
Charters  were  to  expire  at  the  end  of  the  first  session 
of  Parliament  after  the  1st  June  or  1st  December, 
1862.  The  renewed  charters,  it  will  be  observed, 
continued  in  force  all  the  provisions  for  the  public 
security  previously  adopted  in  either  Lower  Canada 
or  Upper  Canada.  Among  these  were  the  prohibi 
tion  of  loans  to  a  foreign  state,  and  of  voting  by 
alien  shareholders,  the  cessation  of  business  by  way 
of  discount  or  otherwise  during  a  suspension  of  specie 
payments,  the  enforcement  of  subscriptions  to  capi 
tal  stock  by  requiring  an  immediate  payment  of  10 
per  cent.,  the  penalties  in  the  bank's  favor  for  default 
upon  calls,  and  the  bank's  prior  lien  upon  stock 
holders'  debts.  For  the  Lower  Canada  banks  the 
most  important,  and  probably  the  most  objectionable 
innovation,  was  the  imposition  of  the  double  liability 
upon  their  shareholders,  a  restriction  which  they  had 
escaped  at  the  time  it  was  required  of  the  younger 
banks  of  the  western  province  in  1838-34. 

The  royal  assent  to  the  four  laws  was  not  pro 
claimed  until  the  27th  April,  1842.  In  October  assent 
was  granted  to  acts  extending,  on  similar  conditions, 
the  charters  of  the  Bank  of  Upper  Canada  and  the 
Commercial  Bank  of  the  Midland  District,  permitting 
additions  to  their  capitals  and  subjecting  their  share 
holders,  like  those  of  other  banks,  to  the  double  lia 
bility.  The  increased  banking  capital  thus  authorized 
was  for  the— 

City  Bank,  4  and  5  Vic.,  cap    97. ...  £100,000 


Quebec  Bank, 
Bank  of  Montreal, 
Bank  of  N.  D., 
Commercial  Bank, 
Bank  of  Upper  Canada, 


94....  150, 000 l 

98....  250,000 

96. ...  100,000 

26....  300,000 

27....  300,000 


Total £1,200,000 

Total  existing  capital,  1st  July,  1841,  say    1,985,000 

Already  authorized  by  royal  charter. 


The  Legislation  of  3841  and  1843  119 

In  1842,  certainly,  there  was  no  monopoly  of  banking 
investments.  Whoever  wished  might  buy.  Nor  was 
there  other  monopoly.  The  freedom  with  which 
charters  were  afterwards  granted  shows  that  the 
business  was  opened  to  more  promoters  than  could 
provide  the  capital  wherewith  legally  to  qualify  to 
enter  it. 

The  Lower  Canada  banks  and  the  Bank  of  the 
Niagara  District  had  been  granted  but  two  years 
within  which  to  secure  the  new  capital  authorized. 
The  other  Upper  Canada  banks  got  five  years,  and  in 
1846  the  term  was  extended  to  1850.  (9  Vic.,  caps. 
86  and  87.)  In  1846  these  two,  together  with  the 
Bank  of  the  Niagara  District,  were  authorized  to  set 
aside  £150,000  each  and  £50,000  of  stock  respectively, 
to  be  known  as  "  English  stock,1'  the  dividends  to  be 
made  payable  in  London,  and  books  to  be  opened  in 
that  city  for  the  transfer  of  shares.  (7  Vic.,  cap. 
62.)  This  is  a  second  indication  of  the  reviving 
prosperity  of  the  province  and  the  demand  for  loan 
able  capital,  of  which  one  of  the  first  signs  is  the 
increase  of  stock  authorized  in  1841  and  1842. 


§19. BANK  RETURNS  FOR  1841;    THE  BANK  OF  BRITISH 

NORTH  AMERICA  AND  LA  BANQUE  DU  PEUPLE 

Altogether  there  were  ten  banks  that  reported  to 
the  committee  of  1841.  One  of  these,  the  Bank  of 
the  People,  in  Toronto,  had  already  been  sold  to  the 
Bank  of  Montreal,  and  reported  only  the  amount  of 
its  stock.  Two  others,  the  Farmers'  Joint  Stock 
Banking  Company  and  La  Banque  du  Peuple,  were 
private  banks  acting  under  a  deed  of  settlement  and 


120  The  Canadian  Banking  System,  1817-1890 

articles  of  co-partnership,  respectively.  A  fourth, 
the  Bank  of  British  North  America,  was  a  company 
formed  in  1836,  with  a  nominal  capital  of  £1,000,000 
stg.,  by  British  capitalists  interested  in  the  prosperity 
and  commerce  of  the  North  American  colonies.1 
£690,000  of  the  capital  were  at  first  paid  up  and  em 
ployed  from  1836  to  1840  in  a  banking  business 
extending  to  both  the  Canadas,  New  Brunswick, 
Nova  Scotia  and  Newfoundland.2  An  act  of  the 
Imperial  Parliament  authorized  the  bank  to  sue  and 
be  sued  in  the  name  of  an  officer  in  England,  and 
similar  acts  were  obtained  from  the  provincial 
legislatures  in  1837  and  1838. 3  The  Nova  Scotia 
act  recites  that  the  company  had  introduced  the 
system  of  cash  credits  and  of  allowing  interest  on 
deposits,  usually  known  as  the  Scotch  system  of 
banking.  To  obviate  the  difficulty  of  acting  under 
many  different  statutes,  the  directors  applied  for  a 
Royal  Charter  in  1840.  They  obtained  it,  one  condi 
tion  being  that  the  capital  of  a  million  pounds  should 
be  fully  paid  up,  and  another,  that  no  notes  under 
the  value  of  £1  currency  should  be  issued.  The 
liability  of  the  stockholders  was  limited  to  the 
amount  of  their  subscriptions. 

1  Vide  R.  M.  Martin,  "History,  Statistics  and  Geography  of  Upper 
and  Lower  Canada,"  London,  1838.  On  p.  277  the  author  claims  for 
himself  and  a  Wm.  Medley,  Esq.,  the  credit  of  first  proposing  and 
interesting  others  in  the  establishment  of  the  British  Bank. 

2  Journal  of  the  House  of  Commons  of  the  Dominion  of  Canada, 
1869,  Appendix  I,  p.  67. 

37  Wm.  IV,  cap.  34,  U.  C.;  8  Wm.  IV,  cap.  16,  N.  B.;  1  Vic.  cap. 
24,  N.  S.;  1  Vic.,  cap.  25,  L.  C.  . 


Bank  Returns  for  1841  121 

The  condition   of  the  banks  on  days  near  the  1st 
July,  1841,  was  as  follows:1 


BANKS 

Capital 

Circula 
tion 

Total 
Specie 

Deposits 

Dis 
counts 

Bank  of  B.  N.  America. 
Montreal  Bank  

£ 
690,360 
500  000 

£ 
50,564 
227  048 

£ 
45,828 
125  175 

£ 
184,899 
?34  686 

£ 
575,752 
936  553 

People's  Toronto  

50  000 

City  Bank 

f>00  000 

108  57° 

9Q  378 

50  700 

340  391 

Banque  du  Peuple    .... 

115  759 

58  211 

8,170 

95*360 

183  378 

Com.  Bank  of  Midi.  Dist 
Bank  of  Upper  Canada, 
Farmers'  Bank    

200,000 
200,000 
45  122 

205,429 
142,849 
14  350 

82,890 
55,125 
7  867 

98,671 
144,093 
3  079 

461,615 
406,927 
54  281 

Gore  Bank  

100  000 

77,1  77 

26*385 

14*481 

165  936 

Quebec  Bank  

75,000 

37  787 

15  069 

55  219 

145  362 

Total  currency   

2-325  450 

921  991 

386  891 

811  191 

39^9499 

Viger,  De  Witt  et  Cie.,  the  French  partnership  in 
commendam,  were  incorporated  in  1843  as  "La 
Banque  du  Peuple."  The  principal  office  was  to  be 
as  formerly  in  Montreal,  and  the  authorized  capital 
£200,000,  the  full  payment  of  which  was  required 
within  two  years  from  the  passing  of  the  act.  (7 
Vic.,  cap.  66.)  The  character  of  the  partnership  and 
the  division  of  powers,  profits  and  liabilities  between 
the  two  classes  of  partners  have  been  sufficiently 
described  near  the  close  of  chapter  ii.  This  peculiar 
constitution,  a  device  used  in  mediaeval  times  to  evade 
the  prohibition  of  usury,  was  continued  by  the 
charter,  and  the  stockholders  have  obstinately  clung 
to  it  ever  since.  The  qualification  of  the  principal 
partners  or  ''members"  was  the  ownership  of  not 
less  than  forty  shares  each,  of  a  total  value  of  £500. 


L  Journal,  Can.,  1841,  Appendix  0,  statement  F. 


122  The  Canadian  Banking  System,  1817-1890 

New  members  might  be  admitted  and  old  ones  with 
draw,  proper  notice  being  given  of  the  change,  but 
the  total  number  of  members  was  never  to  be  less 
than  seven  nor  more  than  fifteen.  The  corporation 
as  thus  constituted  was  subjected  to  the  same  restric 
tions  as  to  note  issue,  total  liabilities,  suspension  of 
redemption  of  specie,  etc.,  and  granted  the  same 
powers,  as  the  joint  stock  banks. 


§20. — CORRESPONDENCE  WITH  RESPECT  TO  THE  DOLLAR 
NOTE  CIRCULATION 

The  circular  of  Sir  John  Russell  contained  certain 
regulations  respecting  the  issue  of  bank  notes  under 
£1  currency,  which  had  been  embodied  neither  in 
the  committee  report  of  1841,  nor  in  charters  passed  in 
that  year.  But  as  those  acts  had  been  fully  considered 
by  the  local  legislature  and  the  Governor-General, 
as  a  disallowance  might  have  caused  embarrassment 
in  Canada  at  the  time,  and  as  the  power  of  regulating 
the  note  issue  in  the  future  was  reserved  by  the  char 
ters  to  the  legislature,  the  Queen  was  advised  to  con 
firm  them.1  Her  Majesty's  Government,  the  Gov 
ernor-General  was  informed,  attached  great  import 
ance  "to  the  early  reduction  of  that  small  paper  cir 
culation  to  which  the  Acts  in  question  give  encourage 
ment,"  and  it  was  hoped  "that  the  Canadian  Legisla 
ture  will  at  an  early  period  revise  this  part  of  the 
system  of  banking  in  the  province  and  secure  to  the 
people  of  Canada  the  benefit  of  a  metallic  circula 
tion,  which  is  incompatible  with  the  circulation  of 
paper  of  this  description."2 

'Journal  Can.,  1843,  p.  49,  Despatch  no.  103. 
2 Journal  Can.,  1843,  p.  49,  Despatch  no.  103. 


Dollar  Note  Circulation  123 

A  charter  was  passed  in  1846,  the  effect  of  which 
would  have  been  to  extend  the  small  note  circula 
tion.  The  imperial  authorities  felt  that  the  Canadian 
government  had  had  in  four  years  ample  time  for 
considering  the  tendencies  of  their  system  of  bank 
ing,  that  the  reasons  of  temporary  expediency  en 
tertained  in  1842  for  waiving  their  objections  to  five 
shilling  bank  notes  did  not  equally  apply  to  the  new 
measure,  and  that  the  existence  of  rights  of  issue 
formed  no  reason  for  the  concession  of  similar  rights 
to  new  establishments.  Privileges  of  issue  enjoyed  by 
banks  in  the  United  Kingdom  before  the  acts  of  1844 
and  1845,  had  been  withheld  from  the  banks  formed 
after  a  certain  date.  They  believed  that  a  dollar  note 
circulation  was  unsound  and  dangerous.  The  same 
reasons  which  prompted  the  abolition  of  £1  notes  in 
England,  called,  in  their  opinion,  for  the  restriction 
and  ultimate  discontinuance  of  the  dollar  notes  in 
Canada.1  Earl  Grey,  however,  was  unwilling  that 
the  bill  should  be  abruptly  disallowed.  Accordingly, 
he  referred  it  back  to  Lord  Elgin  and  the  Executive 
Council  of  the  province,  with  the  promise  that  if  they 
thought  a  change  inexpedient  the  royal  assent  would 
not  be  withheld.  The  Canadians  favored  the  reten 
tion  of  their  dollar  notes  and  assent  to  the  bill  was 
promulgated  in  January,  1848. 

This  was  the  last  noteworthy  endeavor  of  the 
Lords  Commissioners  of  Her  Majesty's  Treasury,  act 
ing  through  the  Colonial  Office,  to  substitute  "a  cur 
rency  founded  on  a  sound  and  metallic  basis"  for 
the  dollar  notes  issued  by  the  Canadian  banks. 

'Journal,  Can.,  1847,  Appendix  W,  Despatch  respecting  the  bill  of 
last  session  incorporating  La  Banque  des  Marchands. 


124  The  Canadian  Banking  System,  1817-1890 

Those  notes,  though  objectionable  from  a  theoretical 
standpoint,  were  not  the  cause  of  practical  inconve 
nience  or  loss.  The  dangers  of  an  excessive  issue 
were  averted  by  the  limitation  of  notes  under  j£l 
to  one-fifth  the  paid-in  capital  stock  of  the  issuing 
bank,  and  the  active  system  of  redemption  between 
the  banks.  And  when,  in  1870,  the  banks  finally 
gave  up  the  small  note  issue,  Canadians  did  not  dis 
pense  with  paper  of  such  denominations.  They 
simply  transferred  the  issue  to  the  government. 


§21. — IMPERIAL    REGULATIONS    OF    1846 

The  despatch  quoted  in  §20  called  attention  to 
other  deviations  from  the  last  regulations  respect 
ing  colonial  banks.  These  provisions,  somewhat  dif 
ferent  from  those  of  1840,  were  communicated  in 
1846,  together  with  the  following  self-explanatory 
letter:1 

Circular  30th  May,  1840,  with  Revised  Regulations  to  be  observed  in  in 
corporating  banking  companies  in  the  Colonies. 

MY  LORD:  On  the  4th  of  May,  1840,  Lord  J.  Russell  transmitted  to 
you  a  copy  of  certain  regulations,  the  observance  of  which,  in  all 
charters  or  legislative  enactments  relating  to  the  incorporation  of 
banking  companies  in  the  Colonies,  Her  Majesty's  Government  then 
considered  of  much  importance.  The  correspondence  which  has 
since  taken  place  on  subjects  of  this  nature,  and  the  arrangements 
adopted  by  Parliament  in  regard  to  Banks  of  Issue  in  the  United 
Kingdom,  appear  to  Her  Majesty's  Government  to  have  rendered 
necessary  some  modification  of  those  regulations,  with  a  view  to 
bring  them  into  exact  correspondence  with  the  principles  on  these 
subjects  established  in  this  country.  *  *  *  * 

These  regulations  are  forwarded  to  you,  not,  of  course,  as  inflexi 
ble  rules  to  be  in  all  cases  insisted  on,  but  as  embodying  the  gen 
eral  principles  to  be  observed  in  the  preparation  of  Colonial  Acts 

1  Journal,  Can.,  1847,  Appendix  W. 


Imperial  Regulations  0/1846  125 

for  the  incorporation  of  banking  companies,  and  Her  Majesty's 
Government  consider  a  compliance  with  all  the  more  material  con 
ditions  and  restrictions  of  much  importance  to  the  security  of  the 
communities  in  which  such  banks  may  be  established,  and  more 
especially  to  the  poorer  classes  of  such  communities.  I  must,  there 
fore,  impress  upon  you  the  necessity  of  using  all  your  legitimate 
influence  to  procure  their  introduction  into  any  bills  which  may  be 
brought  into  the  Legislature  of  the  Colony  under  your  Government, 
for  the  incorporation  of  banking  companies,  and  with  this  view  it 
might  be  well  that  you  should  communicate  with  the  promoters  of 
any  such  bills  in  which  these  considerations  may  be  omitted,  and 
point  out  to  them  that  the  instructions  which  you  had  received  from 
Her  Majesty's  Government  would  place  you  under  considerable  dif 
ficulty  in  assenting  to  any  sucii  bill,  should  it  pass  the  Legislature  in 
its  actual  form.  I  can  hardly  doubt  that  such  a  communication, 
aided  by  an  explanation  of  the  grounds  on  which  Her  Majesty's 
Government  have  proceeded  in  drawing  up  these  regulations,  would 
have  the  desired  effect;  but  if  not,  and  you  should  nevertheless  feel 
it  your  duty  to  assent  to  the  Act,  it  would  be  necessary,  in  transmit 
ting  the  Act  for  the  signification  of  Her  Majesty's  pleasure,  that  you 
should  accompany  it  by  a  full  report  of  the  grounds  on  which  you 
have  proceeded.  I  have,  etc., 

"VV.  E.  GLADSTONE. 
Lieutenant-General, 

THE  EARL  OF  CATHCART,  K.  C.  B.,  etc.,  etc.,  etc. 

Following  Mr.  Gladstone's  letter  are  twenty  regu 
lations.  The  essential  variations  from  the  report  of 
1841,  and  the  existing  legislation,  are: 

(a)  When  shares  are  transferred  between  the  period 
of  the  grant  of  the  charter  and  the  actual  commenc 
ing  of  business  by  the  bank,  the  responsibility  of  the 
original  holder  to  continue  for  six  months,  at  least, 
after  the  date  of  the  transfer  (§8). 

(b)  The  total  debts  of  the  company  not  to  exceed 
thrice  the  paid-in  stock,  "over  and  above  the  amount 
of  deposits  or  banking  accounts  with  the  company's 
establishments"  (§13).    (The  expression  in  the  report 
is  "deposits  of  specie  and  government  paper.''     The 


126  The  Canadian  Banking  System,  1817-1890 

utility  of  this  provision  particularly  after  circulation 
was  limited  to  paid-in  capital,  is  extremely  doubt 
ful.) 

(c)  No  promissory  note  to  be  issued  for  less  than  £1 
Halifax  currency,  and  none  for  fractional  parts  of 
such  pound  (§14). 

(d)  Breach  of  the  special  conditions  upon  which 
the  company  is  empowered  to  open  banking  estab 
lishments,  or  to  issue  and  circulate  promissory  notes, 
to    forfeit   those   privileges,   which    shall   cease   and 
determine  upon  such  forfeiture  as  if  the  period  for 
which  they  had  been  granted  had  expired  (§18). 

(e)  The  charter  or  act  of  incorporation  may  provide 
for  additions  to  the  capital  of  the  company,  within 
specified  limits,  with  the  sanction  of  the  Lords  Com 
missioners  of  the  Treasury,  such  additions  to  be  sub 
ject  to  all  conditions  and  regulations  applying  to  the 
original  capital  (§20). 

The  retention  in  Canada  of  notes  under  £1,  and  the 
waiver  of  their  objections  by  the  Lords  of  the  Trea 
sury,  have  been  noticed  in  §20.  The  legislature  did 
not  venture  to  permit  increase  of  capital  stocks  with 
out  its  express  authority  for  each  instance.  But  the 
provision  of  regulation  number  eight  was  embodied  in 
subsequent  charters  as  a  necessary  safeguard  against 
subscriptions  in  bad  faith  or  decoy  subscriptions  to 
the  stock  of  new  banks.  So,  too,  penalties  of  charter 
forfeiture  were  imposed  for  breach  of  the  various 
condi'tions  on  which  corporate  powers  and  privileges 
were  granted,  just  as  that  penalty  had  been  attached 
to  the  condition  that  no  suspension  of  specie  payment 


Imperial  Regulations  0/1846  127 

should  exceed  sixty  days,  consecutively,  or  during 
the  year.1 

The  document  just  described  concludes,  for  the 
present,  the  account  of  the  relations  of  the  Lords  of 
the  Treasury  to  the  legislative  development  of  the 
Canadian  banking  system.  It  has  been  shown  that 
three  of  the  most  important  groups  of  restrictions 
were  not  imposed  upon  Canadian  banks  until  after 
the  Treasury  regulations  of  1833,  1840  and  1846,  res 
pectively,  had  been  transmitted  to  North  America. 
It  has  appeared  that  certain  new  precautions,  substan 
tially  similar  to  those  recommended,  were  taken  with 
regard  both  to  existing  banks  and  new  establishments 
soon  after  the  Treasury  circulars  were  received  via 
Downing  street.  In  the  sketch  of  the  banking  sys 
tems  of  Nova  Scotia  and  New  Brunswick,  it  will 
appear  that,  about  the  same  time,  like  restrictions 
were  adopted  by  those  colonies  for  the  government 
of  their  incorporated  banks.  The  correspondence  of 
1833-1834  with  Upper  Canada,  the  protest  of  the  col 
onists  that  banking  is  a  local  matter,  the  subjection 
of  the  Gore  Bank  to  the  double  liability  and  other 
provisions,  the  supervision  of  legislation  in  the  years 
immediately  before  and  after  the  crisis,  finally  the 


JCf.  10  and  11  Vic.,  cap.  112,  an  Act  to  incorporate  the  District 

Bank  of  Quebec. 
18  Vic.,  cap.  202,  an  Act  to  incorporate  the  St.  Francis  Bank. 

18  Vic.,  cap.  202,  an  Act  to  incorporate  the  Molsons'  Bank. 

19  Vic.,  cap.  76,  an  Act  to  amend  and  consolidate  the  several 

Acts  incorporating  and  relating  to  the  Bank  of  Montreal 
19  and  20  Vic.,  cap.  120,  an  Act,  &c.  (similarly  for  the  Com 
mercial  Bank). 

19  and  20  Vic.,  cap.  121,  an  Act,  &c.  (similarly  for  the  Bank 
of  Upper  Canada). 


128  The  Canadian  Banking  System,  1817-1890 

action  in  1841  of  the  select  committee  upon  banking, 
are  pertinent  incidents,  but  they  form  only  links  in 
the  chain.  It  must  be  remembered  that  before  the 
banking  acts  of  1841  and  1842  came  into  effect  they 
were  submitted  to  British  inspection,  and  that  the 
regulations  of  1846  were,  in  due  time,  enacted  as 
Canadian  law.  From  evidence  so  varied,  forcible 
and  clear  as  the  facts  presented,  two  conclusions  are 
not  to  be  avoided.  One  is,  that  through  the  Lords  of 
the  Treasury  the  ripe  experience  of  Britain  in  matters 
of  banking  was  used  for  the  direct  advantage  of  the 
colonists;  the  other,  that  in  1850  the  more  important 
safeguards  in  British  American  bank  charters  were 
primarily  due,  not  to  the  wisdom  of  local  legislatures, 
but  to  the  judicious  intervention  of  the  Imperial 
Government. 


.—1847-1850 

Canada  had  shared,  to  a  considerable  degree,  the 
commercial  recovery  from  the  trying  losses  of  1837- 
1839.  Indications  of  this  were  apparent  as  early  as 
1841,  when  the  banks  secured  provision  for  the  in 
crease  of  their  capitals.  The  business  of  1843  was 
described  as  sound  and  legitimate,  with  few  and  un 
important  failures.1  The  improvement  in  1844  was 
still  more  active,  and  the  banks  were  able  profitably 
to  employ  the  large  amounts  of  capital  which  had 
been  at  low  interest  the  year  preceding.2  The  growth 

1  Bankers'  Magazine,  vol.  i,  London,  1844,  p.  325. 
2BankersJ  Magazine,  vol.  iii,  Report  of  the  Meeting  of  the  Bank  of 
British  North  America. 


1847-1850  129 

proceeded,  and  in  1846  a  considerable  extension  of 
commerce    and    agriculture    to  new  districts  was    a 
feature  of  the  situation.     In  February  the  bank  note 
circulation,  only  £953,916  four  years  before,  touched 
£1,681,248,  nearly  the  highest  amount  reached  dur 
ing  the  period  1841  to  1848. J     But  the  money  pres 
sure  in  England  was  felt,  and  though  the  state   of 
trade  seemed  satisfactory,  shrewd  onlookers  of  Can 
adian    events  had   some  apprehension  for  the  near 
future.2     The  importations  of  1847  were    excessive. 
The    consternation    caused  by  the    English    railway 
crash  spread  to  Canada.     Numerous  commercial  fail 
ures    occurred    involving    large    liabilities.       Lower 
Canada,  or  Canada  East,  as  it  was  now  called,  suf 
fered  the  most,  partly  because  the  previous  expan 
sion    had    there    been    more    pronounced.      Extreme 
depression  followed  in  1848.     The  effects  of  the  free 
trade  policy  of  Lord  John  Russell  and  his  party  were 
first  felt  in   their  full  force.      Canada  had  lost  the 
partial   monopoly  in  timber  and  other   natural  pro 
ducts  established  in  its  benefit  by  the  old  protective 
system.     The   exports  of  pease  fell  25  per  cent.,  of 
wheat  60  per  cent.,   flour  40  per  cent.,  oats  over  75 
per  cent.,  barley  nearly  80  per  cent.,  and  pork  45  per 
cent.      The    stop    put    to    British    railway  extension 
especially  affected  the  timber  trade.     A  large  stock 
of  timber  was  wintered  at  Quebec  ;    in  every  article 
but  white  pine,  the  exports  of  1848  fell  from  those  of 
1847  by  percentages  ranging  from  14  for  deals,  25  for 

Journal,  Canada,  1849,  Appendix,  Return  to  an  Address  of  the 
Legislative  Assembly,  dated  29th  January,  1849. 
2 Bankers'  Magazine,  vol.  vi,  p.  106. 

9 


130  The  Canadian  Banking  System,  1817-1890 

elm,  33  for  ash,  to  50  per  cent,  for  oak  timber.1  The 
imports  of  1848  fell  to  £2,958,798,  £837,049  less  than 
in  1847. 

Such  an  economic  shock  reacted,  of  course,  upon 
the  banks.     Their  circulation,  which  stood  in  March, 

1847,  at  £1,684,413,  had  diminished  by  £321,000  on 
the  31st  December,  and  fell  to  £1,114,208  in  June, 

1848.  They   could   have   accepted  this   contraction 
alone,  without  complaint.     It  was,  however,  accom 
panied  by  losses  of  other  kinds.     In  1848  and  1849 
the   Bank  of  British  North  America  was  obliged  to 
set  aside  £43,100  for  bad  debts,  reduce  its  dividend 
to  5  per  cent.,  and  take  £6,000  from  its  rest.2     The 
City  Bank  wrote  off  a  rest  of  £27,875,  the  Gore  Bank 
lost  the  whole  of  its  rest.3     In  1849  the  capital  of  the 
Gore  Bank  was  reduced  from  £100,000  to  £80,000,  on 
account  of  the  losses  it  had  suffered  (12  Vic.,  cap.  149), 
and  that  of  the  City  Bank  from  £500,000  of  author 
ized  stock  to  £375,000,  the  paid-in  stock  from  £294,- 
000  to  £221,000,  the  value  of  each  share  from  £25  to 
£18  10s.  (12  Vic.,  cap.  145).     The  Quebec  Bank  paid 
dividends  of  only  3,  2,  and  4  per  cent,  in  1848  to  1850. 
The   dividend   of   the   Bank   of    Upper  Canada   was 
reduced  from  7  per  cent,  to  4  and  4^  in  the  years 
succeeding   the    crisis,  and    more  than    £6,000    was 
deducted  from  its  rest.     The  Bank  of  Montreal  suf 
fered  more  after  the  fashion  of  the  Lower  Canada 
banks,  reducing  its  rest  by  £60,000,  and  its  dividend 
from  7i  per  cent,  in  1846  to  6  per  cent,  in  1849. 

1  Journal,  Can.,  1849,  Appendix  Z,  Montreal   Brokers'  Circular, 
25th  March,  1849. 

^Bankers'  Magazine,  vol.  x,  p.  443. 
3Journal,  Can.,  1859,  Appendix  no.  67. 


1847-1850  131 

But  not  a  single  chartered  bank  failed,  specie  pay 
ments  were  maintained  throughout,  and  the  losses 
suffered  were  borne  by  the  shareholders  alone. 

In  1848  the  legislature  had  passed  acts  permitting 
various  additions  to  the  capitals  of  the  Montreal, 
Quebec  and  City  Banks,  and  in  1849  to  that  of 
the  Gore  Bank.  Additions  amounting,  in  all,  to 
£750,000  were  authorized,  and  in.  the  latter  year 
the  time  for  paying  up  these,  as  well  as  the  addi 
tions  previously  permitted  to  the  Bank  of  Upper 
Canada  and  the  Commercial  Bank,  were  extended 
to  April,  1852. l 

A  general  act  of  1850,  concerning  the  chartered 
banks,  declared  their  right  and  power  to  take,  hold 
and  dispose  of  mortgages  and  hypotheques  upon 
personal  as  well  as  real  property,  by  way  of  addi 
tional  security  for  debts  contracted  to  them  in  the 
course  of  their  business.  They  were  authorized  to 
purchase  lands  or  real  estate  offered  for  sale  under 
execution  at  the  suit  of  the  bank  purchasing,  or 
exposed  for  sale  under  a  power  of  sale  given  to  the 
bank.  The  banks  might  finally  acquire  and  hold  an 
absolute  title,  either  by  release  of  the  equity  of  re 
demption  or  foreclosure  in  the  Court  of  Chancery. 
(13  and  14  Vic.,  cap.  22.)  This  legislation  is  to  be 
explained  not  as  an  extension  of  the  loaning  powers 
of  the  banks,  but  as  protection  to  them  against  loss 

*10  and  11  Vic.,  cap.  115,  Provincial  Statutes  of  Canada. 
10  and  11  Vic.,  cap.  114,  Provincial  Statutes  of  Canada. 
10  and  11  Vic.,  cap.  116,  Provincial  Statutes  of  Canada. 
12  Vic.,  cap.  149,  Provincial  Statutes  of  Canada. 
12  Vic.,  cap.  170,  Provincial  Statutes  of  Canada. 
12  Vic.,  cap.  184,  Provincial  Statutes  of  Canada. 
12  Vic.,  cap.  1£5,  Provincial  Statutes  of  Canada. 


132  The  Canadian  Banking  System,  1817-1890 

upon  overdue  debts.  It  is  best  understood  in  connec 
tion  with  the  agitation  for  increased  banking  facili 
ties,  and  greater  assistance  to  the  less  important 
communities,  the  discussion  of  which  is  reserved  for 
the  next  chapter. 


CHAPTER  V 
PROVINCE    OF    CANADA,   1850-1867 

§23. THE  FREE  BANKING  ACT  OF    18501 

Ix  the  session  of  1850  the  Hon.  William  Hamilton 
Merritt  introduced  in  the  Legislative  Assembly  a  bill 
"to  establish  Freedom  of  Banking  in  this  Province, 
and  for  other  purposes  relative  to  Banks  and  Bank- 
ing." 

The  group  of  large  chartered  banks  which  had 
hitherto  carried  on  the  banking  business  of  the  Cana- 
das  seemed  to  the  general  public  to  be  insufficiently 
equipped  with  capital.  Their  efforts,  indeed,  during 
the  eight  years  preceding  to  secure  additional  capital 
authorized  by  the  legislature,  had  met  only  a  partial 
success.  The  new  banks  incorporated  in  1841  and 
1847,  three  in  all,  had  failed  to  secure  the  capital  re 
quired  by  law  before  they  could  begin  operations, 
and  had  forfeited  their  charters  by  non-user.  These 
facts  were  not  considered  as  evidence  to  the  effect 
that  Canada  already  had  all  the  banking  investments 
it  could  attract.  Complaints  of  a  lack  of  banking 
facilities  were  frequent,  and  there  was  a  widespread 
agitation  for  an  increase  of  bank  capital,  for  the  ter 
ritorial  extension  of  banking  facilities,  and  particu- 

*§§  23-27,  inclusive,  have  been  rewritten  from  the  article,  "Free 
Banking  in  Canada,"  published  in  the  Journal  of  the  Canadian 
Bankers1  Association  for  March,  1894. 


134  The  Canadian  Banking  System,  1817-1890 

larly  for  the  incorporation  of  small  banks  in  the 
lesser  towns,  where  local  opportunities  for  accommo 
dation  were  much  desired. 

Important  safeguards  in  the  existing  system  were 
the  large  capital  stocks  of  the  banks,  the  small  num 
ber  doing  business,  the  broad  fields  from  which  they 
drew  their  business,  and  the  prudent  and  cautious 
manner  in  which  that  business  was,  as  a  whole,  con 
ducted.  It  was  thought  that  in  maintaining  the 
system  it  would  be  very  difficult  for  the  legislature 
to  refuse  to  incorporate  small  banks  for  the  small 
towns.  But  to  allow  such  institutions  the  import 
ant  privileges  of  the  chartered  banks,  especially  that 
of  circulating  notes  as  only  a  general  charge  against 
assets,  seemed  too  great  a  risk.  If  small  banks  were 
to  be  established,  it  was  necessary  to  devise  some 
other  plan  for  issuing  a  sound  currency.1  There  was 
no  bank  of  such  predominant  position  that  to  it  alone, 
as  to  the  Bank  of  England,  the  function  of  issue 
could  be  entrusted;  after  the  failure  of  Lord  Sy den- 
ham's  proposals  of  1841,  there  was  no  probability  of 
establishing  a  government  bank  of  issue;  and  the 
government  itself  was  in  such  pressing  financial  need 
that  any  step  towards  relief  was  welcome.2 

1  Journal,  Can.,  1851,  Appendix  LL,  p.  202,  Memorandum  of  the 
Inspector- General  upon  13  and  14  Vic.,  cap.  31. 

2The  whole  period,  1847  to  1852,  was  one  of  severe  depression  for 
Canada,  which  had  lost,  by  the  free  trade  policy  of  Great  Britain,  the 
advantages  enjoyed  in  the  era  of  protection.  "Three-fourths,"  it 
was  said,  "of  the  commercial  men  are  bankrupt  owing  to  free  trade." 
They  had  been  stripped  of  their  partial  monopoly  in  such  commodi 
ties  as  Canada  produced.  The  people  were  economically  desperate 
and  highly  susceptible  to  fomentation  into  political  discontent.  In 
order  to  meet  just  demands  upon  the  provincial  government,  for 
which  the  public  funds  were  insufficient,  it  became  necessary  in  1848 
to  issue  six  per  cent,  debentures  payable  in  one  year  after  date,  and 


The  Free  Banking  Act  of  1850  135 

The  Banks  of  Montreal  and  British  North  America 
then  (June,  1849)  exclusively  had  the  account  of  the 
government.  The  one  refused  absolutely  to  furnish 
exchange  for  £10,000  on  the  three  months'  note  of 
the  Receiver  General,  to  meet  interest  payments  in 
England;  the  other,  in  respect  to  a  similar  sum,  at 
first  demanded  collateral  security,  and  finally  also 
refused.  But  when  the  specie,  come  by  lucky  chance 
into  the  government  chest,  was  produced,  both  banks 
found  the  required  exchange.1 

Already,  in  1830,  it  had  been  proposed  to  establish 
a  ''system  of  banking  founded  upon  capital  invested 
in  permanent  securities,  and  limited  according  to 
amount  of  capital  stock  so  invested."  The  plan 
was  then  rejected  as  "too  difficult  in  the  present 
state  of  the  Province."1  Canadians  in  the  meanwhile 
had  noticed  the  evils  sustained  by  the  public  of  the 
United  States  from  systems  of  banking  which  re 
sembled  their  own,  in  so  far  as  they  were  chartered 
systems.  More  particularly  had  they  observed  the 
banking  legislation  of  New  York.  Thus  Mr.  Fran 
cis  Hincks,  while  advocating  in  1838  a  general  bank 
ing  law.  commented  upon  the  recommendation  con 
tained  in  the  last  message  of  the  governor,  and  en 
deavored  to  show  an  analogy  between  the  situation 
there  and  in  Canada.  The  "free  banking"  law  of 
New  York  had  been  in  force  since  1838.  After  a 
costly  experience,  the  statute  had  been  so  altered 
and  amended  that  in  1850,  with  only  United  States 

for  sums  as  low  as  $10  (£2  10s.).  (12  Vic.,  cap.  5.)  At  the  time,  of 
course,  these  were  negotiable  only  under  par. 

1  Vide  "Reminiscences,  etc.,"  Hincks,  pp.  188,  197,  and  Journal, 
Can.,  1854,  Appendix  EE. 

2Journal,  IT.  C.,  1831,  Appendix,  p.  201,  2d  report  of  Select  Com 
mittee  on  Currency. 


136  The  Canadian  Banking  System,  1817-1890 

or  New  York  securities  receivable  on  deposit  with 
the  state,  with  a  system  of  immediate  note  redemp 
tion,  with  each  bank  confined  to  a  single  place  and 
obliged  to  exercise  there  the  discount  and  deposit,  as 
well  as  issue  functions,  and  with  the  stockholders 
subjected  to  double  liability,  it  presented  a  carefully 
wrought  out  system  of  banking  law. 

The  commercial  relations  between  the  Upper  Prov 
ince  and  New  York  had  long  been  close  and  impor 
tant.  When  the  economic  conditions  of  the  two 
countries  were  compared,  New  York,  no  doubt, 
appeared  to  marked  advantage.  The  legislation  of 
New  York,  therefore,  was  not  unlikely  to  be  regarded 
by  Canadians  as  recommended  by  the  success,  pros 
perity  and  credit  of  the  state  in  which  it  was  in 
force.  Its  influence  was  not  necessarily  the  weaker 
because  the  judgment  as  to  results  was  not  entirely 
logical.  The  emphatic  adherence  given  to  free  bank 
ing1  by  Millard  Fillmore,  as  comptroller  of  the  state 
for  1849,  was  followed  by  the  adoption  of  laws  drawn 
on  the  New  York  model  in  Massachusetts,  Ohio,  Ver 
mont,  Wisconsin,  and  other  American  states.2  Cana 
dians  also  remarked  that  the  system  had  worked  sat- 
isfactorily  and  that  its  effect  had  been  to  raise  the 
value  of  public  securities  very  materially.3 

They  overlooked  the  fact  that  in  New  York  the  free 
banking  system  had  been  established  primarily  as  (a) 
an  escape  from  the  complete  monopoly  of  banking, 
discount  and  deposit,  as  well  as  issue,  conferred  upon 


deport  of  the  Comptroller  of  the  State  of  New  York,  1849,  pp. 
55,  56. 

2  Report  of  the  Comptroller  of  the  Currency.  Washington,  1876,  p. 
85. 

3  Journal,  Canada,  1851,  ut  supra. 


The  Free  Banking  Act  of  1850  137 

the  chartered  banks  in  1818,  and  (b)  a  remedy  for  the 
shameless,  corrupt  and  unendurable  practice  of 
regarding  bank  charters  as  spoils  for  the  victorious 
party  to  deal  out  as  rewards  for  partisan  services.1 
The  chartered  banks  of  Canada,  on  the  other  hand, 
enjoyed  no  exclusive  privilege  save  in  the  function 
of  issue.  Even  in  that  there  was  abundant  competi 
tion.  Nor  was  there  then  the  suspicion  even  of  cor 
ruption  or  partisanship  in  the  distribution  of  bank 
charters.  But  in  spite  of  the  lack  of  analogous  con 
ditions,  in  spite  of  the  facts  that  twenty-nine  New 
York  banks  had  failed  in  the  first  five  years  of  the 
law's  operation,  and  that  the  special  deposits  of  secu 
rities  realized  but  74  per  cent,  of  the  defaulted  notes,2 
Mr.  Merritt's  bill  was  modelled  after  the  free  bank-  \ 
ing  laws  of  New  York.  Its  objects  are  sufficiently 
described  as  (a)  to  provide  for  the  establishment  of 
small  banks,  (&)  properly  to  secure  their  circulation, 
(c)  to  relieve,  in  part  at  least,  the  financial  difficulties 
of  the  government  by  widening  the  market  for  its 
securities,  and  at  the  same  time  so  stimulating  the 
demand  as  to  raise  their  value. 

The  measure  as  passed  (13  &  14  Vic.,  cap.  21)  first  ? 
repealed  the  old  laws  of  Lower  Canada  (Ord.  L.C.  2 
Vic.  (3).  cap.  57),  <;to  regulate  private  banking  and 
the  circulation  of  the  notes  of  private  bankers,"  and 
of  Upper  Canada  (7  Wm.  IV,  cap.  13),  "to  protect 
the  public  against  injury  from  private  banks." 
Henceforth  it  became  lawful  only  for  chartered  banks 
or  other  corporations  or  persons  authorized  under  the 
new  act  to  issue  circulating  notes,  which  were  to  be 
of  the  value  of  five  shillings  or  over.  Notes  under 

Comptroller's  Report,  N.  Y.,  1849,  p.  54. 

2Report  of  the  Comptroller  of  the  Currency,  1876,  p.  23. 


138  The  Canadian  Banking  System,  1817-1890 

five  shillings  were  prohibited.  So  also  circulation  by 
unauthorized  persons  was  forbidden  on  penalty  of 
fines  of  £100. 

The  significant  provision  of  the  act  is  the  extension 
of  the  privilege  of  note  issue  "to  other  persons  or 
corporations  thereunto  authorized  as  provided  for 
herein."  Individuals  or  general  partners  might 
establish  banks,  or  joint  stock  companies  might  be 
formed  to  carry  on  the  business,  but  in  any  case  the 
bank  was  to  have  an  office  in  but  one  place,  and  in 
but  one  city,  town  or  village.  Of  the  companies  was 
required  a  minimum  capital  stock  of  £25,000,  divided 
into  shares  of  £10  or  more.  Articles  of  agreement 
in  notarial  form,  showing  the  name,  place  of  busi 
ness,  capital  stock,  number  of  shares,  names  and 
residences  of  the  shareholders  and  the  time  when  the 
company  should  begin  and  end,  were  the  legal  basis 
for  organization.  After  the  articles  were  duly  filed 
in  stipulated  courts  of  record,  the  companies  became 
incorporated,  and  the  liabilities  of  the  shareholders 
limited  to  double  the  amount  of  their  subscribed 
stock.  The  total  liabilities  of  a  joint  stock  bank 
were  not  allowed  to  exceed  three  times  its  capital 
stock.  Every  institution  working  under  the  act  was 
required  to  keep  bond  fide  an  office  of  discount  and 
deposit,  at  all  times  to  keep  exposed  in  its  place  of 
business  a  list  of  its  partners  or  shareholders,  and  to 
make  detailed  semi-annual  returns  to  the  Inspector- 
General,  as  well  as  to  submit  to  official  inspection  at 
the  discretion  of  the  government. 

In  order  to  issue  notes  the  banks  thus  formed  were 
each  obliged  to  deposit  with  the  Receiver  General 
provincial  securities  for  not  less  than  £25,000  cur 
rency  ($100,000),  par  value,  in  pledge  for  the 


The  Free  Banking  Act  of  1850  ]  39 

redemption  of  their  notes.  Interest  on  the  secur 
ities  was  to  be  paid  to  the  depositor  as  it  accrued, 
and  against  the  bonds  the  Receiver  General  was 
authorized  to  deliver  to  the  bank  an  equal  amount 
of  registered  notes,  printed  from  plates  furnished  by 
the  bank,  upon  paper  selected  by  the  Receiver  Gen 
eral.  When  signed  by  the  proper  officer  these  notes 
were  to  become  notes  of  the  bank.  In  every  case 
they  were  to  be  payable  in  specie,  on  demand,  at  the 
bank's  place  of  business.  They  were  to  be  marked: 
"Secured  by  provincial  securities  deposited  with  the 
Receiver  General,"  and  were  to  be  receivable  for  all 
duties  and  sums  due  to  the  provincial  government, 
so  long  as  the  issuing  bank  redeemed  its  notes. 
These  registered  notes  were  exempt  from  the  rate 
of  one  per  cent,  per  annum  levied  upon  the  average 
monthly  circulation  of  the  chartered  banks.  The 
third  or  fiscal  object  of  the  act  is  especially  plain  in 
that  clause  which  permits  the  chartered  banks  to 
surrender  their  right  of  circulation  against  assets, 
and  to  secure  from  the  Receiver  General  registered 
notes  in  return  for  deposits  of  securities.  Any  of 
the  corporations  within  the  purview  of  the  act  might 
deposit  additional  securities  from  time  to  time,  and 
withdraw  sums  of  not  less  than  £5,000,  provided 
that  like  amounts  of  the  notes  were  returned  to  the 
Receiver  General  and  the  required  deposit  of  £25,000 
maintained. 

If,  in  case  of  suspension  of  specie  payment  and 
protest  of  the  notes,  the  paper  was  not  paid  with 
interest  at  six  per  cent,  within  ten  days  after  the 
requisition  issued  by  the  Inspector  General  of  the 
province  upon  receipt  of  the  protested  notes,  that 
officer  was  commanded  to  close  the  institution  and 


140  The  Canadian  Banking  System,  1817-1890 

wind  up  its  affairs,  should  it  have  no  valid  excuse 
to  offer  for  the  default.  The  process  of  liquidation 
was  to  be  completed  by  a  receiver  appointed  by  the 
Receiver  General.  His  duty  was,  first ,  to  pay  off  the 
notes  from  the  proceeds  of  the  securities  on  deposit. 
The  remaining  proceeds  were  then  to  be  applied,  with 
the  other  assets,  to  settlement  of  the  remaining  debts 
of  the  bank.  But  if  insufficient  funds  were  realized 
from  the  sale  of  the  securities,  the  general  assets  of 
the  bank  were  to  be  applied  to  the  payment  of  the 
notes  before  they  were  used  for  the  other  claims. 
This  is  the  first  appearance  in  Canadian  legislation 
of  that  principle  of  making  bank  notes  a  preferred 
claim,  which,  thirty  years  later,  was  embodied  in  the 
Bank  Act  of  the  Dominion. 


§24 AMENDMENTS  AND  SUPPLEMENTARY  MEASURES 

The  "Act  to  Establish  Freedom  of  Banking"  could 
hardly  be  called  perfect.  Time  proved  it  ill-calcu 
lated  to  promote  the  ends  of  the  legislature  which 
passed  it.  The  amendments  passed  in  the  fol 
lowing  years  show  that  certain  of  its  defects  were 
recognized.  From  the  very  first  it  suffered  severe 
criticism  011  the  part  of  the  English  Lords  of  the 
Treasury.  The  most  serious  defect  of  the  act,  in 
their  opinion,  was  the  lack  of  guarantee  for  the 
immediate  convertibility  of  the  notes  on  demand. 
Against  the  fancied  completeness  of  government 
obligations  as  "security,"  they  cite  the  fall  of  the 
Exchequer  bills  to  35  shillings  discount  in  1847. 
Anxious  as  always  that  the  financial  and  monetary 
systems  of  the  colonies  should  be  sound,  they  warn 
the  Canadian  government  against  the  reverses  fol- 


Amendments  and  Supplementary  Measures  141 

lowing  too  great  an  extension  of  the  facilities  which 
may  be  afforded  by  the  use  of  paper  money.  The 
measure  might  cause  Canadian  securities  to  rise 
temporarily,  but  they  would  also  be  exposed  to  the 
risk  of  depreciation  should  it  become  necessary  to 
throw  them  into  the  market  in  order  to  provide  for 
the  payment  of  bank  notes.  In  the  opinion  of  the 
Lords  of  the  Treasury,  the  great  protection  against  ' 
over-issue  was  the  constant  maintenance  of  a  pro 
portionate  reserve  of  specie  against  the  outstanding 
circulation,  with  government  supervision  and  fre 
quent  publication  of  bank  statements.  They  recom 
mended  the  requirement  of  a  specie  reserve  of  one- 
third  of  the  notes  issued,  and  of  monthly  statements.1 

The  following  year,  accordingly,  an  amendment 
was  passed  requiring  monthly  statements  from  the 
free  banks.  (14  and  15  Vic.,  cap.  69.)  It  is  plain 
that  half-yearly  returns  provided  a  basis  for  intelli 
gent  criticism  to  neither  the  government  nor  the 
public.  The  period  of  one  year  in  which  to  retire 
their  circulation  and  begin  operations  under  the  new 
plan,  accorded  by  the  act  of  1850  to  banks  or  compa 
nies  whose  authority  to  issue  notes  had  been  with 
drawn,  was  increased  to  five  years,  provided  that  in 
each  year  of  the  next  four  they  should  retire  one- 
fourth  of  the  average  circulation,  during  1850,  of 
notes  not  secured  by  a  deposit  of  bonds.  The  re 
quirement  of  a  specie  reserve  of  one-third  was  not  ' 
adopted. 

In  the  same  session,  the  Assembly  passed  another 
act  with  a  view  "to  encourage  the  chartered  banks 
to  adopt  as  far  as  conveniently  practicable,  the  prin- 

1  Journal,  Canada,  1851,  Appendix  LL,  Letter  of  C.  E.  Trevelyan, 
June  11,  1851. 


14:2  The  Canadian  Banking  System,  1817-1890 

ciples  of  the  General  Banking  Act  in  regard  to  the 
securing  of  the  redemption  of  their  bank  notes." 
(14  and  15  Vic.,  cap.  70.)  The  real  purpose,  of  course, 
was  a  further  sale  of  bonds.  The  means  were  (a)  a 
remission  during  the  next  three  years  of  one-half  the 
tax  on  circulation  to  those  banks  willing  forthwith 
to  restrict  their  circulation  to  the  highest  amount 
shown  in  the  last  statement,  and  at  the  end  of  three 
years  to  three-fourths  of  the  average  for  1849  and 
1850  ;  (6)  at  the  end  of  the  three  years,  entire  ex 
emption  from  the  tax  to  banks  with  note  circulation 
thus  restricted ;  (c)  permission  to  such  banks  to  issue 
in  excess  of  the  restricted  circulation  further  notes 
to  the  amount  they  should  hold  of  gold  or  silver  coin 
or  bullion,  or  debentures  of  any  kind  issued  by  the 
Receiver  General,  the  value  of  such  securities  to  be 
reckoned  at  par  ;  (d)  exemption  of  these  banks  from 
the  requirement  to  deposit  the  debentures  and  to 
secure  registered  notes.  But  if  failures  occurred  the 
proceeds  of  bonds  thus  held  by  the  banks  were  to  be 
applied  exclusively  to  the  redemption  of  outstanding 
notes.  Finally,  the  act  imposed  upon  the  chartered 
banks  the  obligation  to  return  monthly,  instead  of 
half-yearly,  statements  of  assets  and  liabilities. 

The  act  of  16  Vic.,  cap.  62  (session  of  1853),  was 
an  attempt  further  "to  encourage  the  issue  by  the 
chartered  banks  of  notes  secured"  in  this  manner. 
They  were  permitted  to  issue  notes  in  excess  of  the 
limit  laid  down  by  their  charters,  i.  e.,  the  amount  of 
their  paid-up  capital  stock,  to  the  amount  of  the  sums 
held  by  them  in  specie  or  debentures  receivable  in 
deposit  by  the  Receiver  General,  although  the  deposit 
of  the  securities  was  not  required.  The  1  per  cent, 
tax  upon  circulation,  also,  was  to  be  calculated  only 


Amendments  and  Supplementary  Measures  143 

upon  the  sum  by  which  the  average  during  any 
period  of  the  outstanding  notes  of  a  bank  should 
exceed  the  average  of  the  securities  and  specie  which 
the  bank  had  on  hand. 

For  these  supplementary  measures,  the  only  analogy 
in  New  York  legislation  is  the  law  of  1849,  which 
permitted  the  Safety  Fund  banks  to  continue  their 
business  after  the  expiry  of  their  charters,  on  con 
dition  that  they  should  deposit  securities  with  the 
comptroller  and  reorganize  under  the  general  bank 
ing  law.1  The  Canadian  measures,  however,  seem 
strongly  to  reflect  the  influence  upon  the  legislature 
of  Sir  Robert  Peel's  Bank  Act  of  1844,  and  the 
statutes  of  1845,  which  dealt  with  the  Scotch  and 
Irish  banks.  The  plan  of  restricting  that  part  of  the 
circulation  "unprotected"  by  special  security,  the 
extension  to  the  banks  of  the  privilege  of  indefinitely 
increasing  circulation  beyond  that  limit,  provided 
equivalent  values  in  specie  or  debentures  were  held, 
and  the  repeated  efforts  to  provide  as  much  as  possi 
ble  of  the  fiduciary  currency  with  bond  security,  are 
not,  to  be  sure,  conclusive  evidence  of  this  influence. 
Such  regulations  might  have  been  adopted  after  inde 
pendent  consideration,  or  to  reach  other  ends  than 
those  sought  by  Lord  Overstone,  Sir  Robert  Peel  and 
their  followers.  In  Canada  too  the  financial  purpose, 
though  the  laws  failed  to  afford  the  anticipated  help, 
was  highly  influential.2 

But  the  inference  that  the  English  example  was 
followed  is  greatly  strengthened  when  we  revert  to 
the  position  of  Mr.  Francis  Hincks  as  Inspector 

'Bank  Statistics,  1849-50,  31st  Congress,  first  Session,  H.  R.  Execu 
tive  Documents,  no.  68,  p.  132. 

2 Journal,  Can.,  1851,  pp,  209  and  216. 


144          The  Canadian  Banking  System,  1817-1890 

General  at  this  time  and  member  of  the  Executive 
Council,  and  to  the  influence  he  enjoyed  in  the  Legis 
lative  Assembly.  Ten  years  before  he  had  supported 
the  proposals  of  Lord  Sydenham  to  regulate  the 
Canadian  note  circulation  by  means  similar  to  those 
suggested  by  Lord  Overstone.1  He  wrote  an  ener 
getic  defence  of  Peel's  Bank  Act  in  1847.  -  As  late 
as  1870  his  views  were  unchanged.3  Mr.  Hincks,  as 
one  of  the  leaders  of  the  government,  was  chiefly 
responsible  for  the  legislation  of  1851-1853. 4  The 
inference  is  practically  confirmed  by  the  fact  that  in 
June,  1851,  the  Colonial  Office  itself  advised  the 
Canadians  to  adopt,  as  far  as  possible,  the  principles 
of  Peel's  Bank  Act  in  their  regulation  of  banking 
and  currency.  lii  Sir  C.  E.  Trevelyan's  letter  for  the 
Lords  of  the  Treasury,  transmitted  through  Downing 
street,  it  is  remarked:  " Although  the  establishment 
of  a  bank  in  connection  with  the  government  appears 
to  have  been  impracticable  or  inexpedient,  it  does 
not  follow  that  some  modification  of  the  scheme 
adopted  in  the  United  Kingdom  with  respect  to  the 
circulation,  the  leading  feature  of  which  is  a  limita 
tion  to  the  amount  of  notes  issued  on  the  credit  of 
securities,  and  the  maintenance  of  a  deposit  of  specie 
equal  to  all  issues  exceeding  that  amount,  might  not 
still  be  attainable  in  Canada."'"'  The  authority  of 
the  officials  in  Downing  street  and  the  promptness 
with  which  their  recommendations  were  usually 
carried  out  in  the  province  leave  no  doubt  of  the 

^'Reminiscences  of  his  Public  Life,"  by  Sir  Francis  Hincks,  p.  69. 

2  Montreal  Pilot,  23d  October,  1847. 

3Parliamentary  Debates  of  the  Dominion  of  Canada,  vol.  i,  p.  216. 

,4 Journal,  Canada,  1851,  p.  209;  1853,  p.  1040. 

5 Journal,  Canada,  1851,  Appendix  LL.  " 


Faults  of  the  /System  145 

marked  effect  of  this  factor  on  the  supplementary 
legislation  in  regard  to  "freedom  of  banking." 


§25. — FAULTS    OF    THE    SYSTEM 

The  possible  dangers  or  faults  of  the  original  act, 
pointed  out  for  the  Lords  of  the  Treasury  in  the  same 
letter,  and  noted  by  us  on  a  preceding  page,  were 
not,  on  the  whole,  the  source  of  much  trouble  in  the 
working  of  the  system.  Very  few  banks,  in  fact, 
began  operations  under  the  law.  The  system  of 
chartered  banks  remained  predominant  and  charac 
teristic.  The  obstacles  to  a  thorough  trial  of  the 
so-called  "free  banking"  were,  first,  the  diminution 
rather  than  increase  of  banking  facilities  which  its 
introduction  would  have  brought  about,  and,  second, 
the  inferior  opportunity  which  it  offered  for  banking 
profits.  The  obstacles  will  be  examined  in  their 
order. 

The  bonds  receivable  on  deposit  as  note  security 
bore  interest  at  6  per  cent.  The  minimum  deposit 
for  a  bank  beginning  business  was  £25,000  currency, 
or  $100,000.  The  small  banks,  however,  which  it 
was  expected  to  establish  under  the  act,  would 
seldom  need  a  capital  greater  than  £25,000,  and,  even 
if  they  needed  it,  a  greater  sum  would  be  hard  to 
get  in  the  localities  whence  the  demand  for  such 
institutions  came.  But  before  a  bank  could  begin 
business  this  hardly-gained  capital  was  to  be  re 
moved  from  the  locality  and  locked  up  in  debentures. 
In  return  for  these,  the  free  bank  was  to  receive  an 
equivalent  amount  in  registered  circulating  notes. 
A  chartered  bank,  on  the  other  hand,  acquired  by 
the  privilege  of  circulation  a  power  of  loaning  to  the 
10 


146  The  Canadian  Banking  System,  1817-1890 

community,  in  addition  to  its  capital  stock,  the 
amount  of  its  authorized  note  issue.  To  meet  the 
needs  of  its  district  the  free  bank  in  our  example 
was  to  derive  from  capital  and  circulation  combined 
a  fund  of  only  £25,000,  i.  e.,  the  amount  of  its  note 
issue,  or  rather  so  much  of  it  as  could  be  kept  in 
circulation,  a  proportion  which  rarely  reached  90  per 
cent.,  and  in  some  cases  did  not  exceed  50  per  cent. 
In  brief,  £25,000  of  the  capital  of  the  district  was  to 
*  be  taken  bodily  away  and  replaced  by  notes,  of  which 
only  a  part  were  available  for  loaning  purposes.  If 
carried  out,  the  scheme  to  provide  banking  facilities 
for  poor  communities  was  destined  actually  to  dimin 
ish  the  loanable  funds  in  the  district  for  whose  benefit 
it  was  devised.1 

Intimately  connected  with  this  fault  is  the  fatal 
defect  of  the  act — the  slight  inducement  to  invest 
ment  afforded  by  its  provisions.  With  its  capital 
locked  up  in  debentures  there  remained  to  the  free 
bank,  besides  its  deposits,  which  need  not  be  con 
sidered  here,  the  £25,000  of  registered  notes  for 
accommodation  of  the  local  public.  Of  these,  we 
have  seen  that  only  50  to  90  per  cent,  constituted  the 
actual  loaning  fund  which  could  be  turned  over 
several  times  a  year  in  banking  operations,  and  from 
which  could  be  derived  the  additional  and  incidental 
profits  that  banks,  in  spite  of  usury  laws  and  other 

1Cf.  the  remarks  of  Washington  Hunt  in  an  official  letter  from 
the  office  of  the  Comptroller  of  New  York,  dated  1st  May,  1849, 
"The  tendency  of  the  change  (from  the  Safety  Fund  system  to  Free 
Banking)  is  to  diminish  materially  the  banking  facilities  enjoyed  by 
the  community.  To  the  extent  that  the  chartered  banks  are  required 
to  transform  their  present  capital  into  permanent  securities  as  a 
pledge  for  the  redemption  of  their  bills,  they  must  deprive  them 
selves  of  the  means  now  employed  in  the  regular  operations  of 
banking."  Quoted  in  Bank  Statistics  ut  supra,  p.  139. 


Faults  of  the  System  147 

hindrances,  will  contrive  to  secure  whenever  the 
markets  permit.  From  an  equal  sum  invested  in  one 
of  the  chartered  banks  could  be  gained  the  banking 
profit  on  the  capital  itself,  and  the  circulation  issued 
upon  the  credit  of  that  capital.  The  advantage  in 
favor  of  the  chartered  bank,  apart  from  the  impor 
tant  consideration  of  its  control  of  much  larger 
means — none  of  its  capital  being  locked  up  in  de 
bentures — was  approximately  the  difference  between 
the  banking  profit  on  the  amount  of  its  capital  and 
the  interest  on  an  equal  amount  invested  in  govern 
ment  securities.  In  other  words,  the  chartered  bank 
would  get  the  greater  return  from  both  circulation 
and  capital ;  the  free  bank  from  circulation  alone, 
its  capital  being  invested,  by  law,  at  a  lower  rate  of 
interest. 

This  higher  gain  to  be  had  from  employing  their 
funds  in  their  own  business  also  caused  the  chartered 
banks,  as  a  rule,  to  reject  the  encouragement  offered 
by  the  legislature  so  to  invest  those  funds  in  deben 
tures  as  to  make  them  practically  a  permanent  loan 
to  the  government.  And  in  a  country  where  the  best 
bank  profits  were  moderate,  other  investors  were  slow 
and  unwilling  to  engage  in  a  form  of  banking  in 
which  the  chances  for  gain  were  still  more  restricted.1 

JCf.  on  this  point,  the  remarks  of  Mr.  Merritt,  the  author  of  the 
bill,  on  the  4th  March,  1859,  in  the  Legislative  Assembly.  "The 
cause  why  the  banks  have  not  succeeded  under  the  Free  Banking 
Act  was  because  his  (the  minister's)  predecessors  had  abandoned 
the  policy  they  had  commenced.  *  *  *  Why  did  not  other 
banking  companies  seek  charters  under  the  Free  Banking  Act? 
Simply  because  they  made  more  money  under  the  old  system." 


148  The  Canadian  Banking  System,  1817-1890 


§26. — STATISTICAL    VIEW    OF    THE    FREE    BANKS 

Among  the  chartered  banks  the  Bank  of  British 
North  America  alone  appears  in  the  statements  pub 
lished  according  to  the  free  banking  laws.  A  sup 
plementary  charter  enabled  it  to  enjoy  under  these 
enactments  a  valuable  privilege  withheld  from  it  by 
the  original  royal  charter,  but  exercised  by  the  other 
banks  under  their  colonial  charters  since  the  time  of 
the  first  incorporation.  This  was  the  right  to  issue 
notes  for  less  than  four  dollars.  Until  the  banks  sur 
rendered  their  small  note  issue  in  1870,  the  British 
Bank  appears  to  have  continued  its  issues  under  this 
act.  At  the  close  of  1854  three  other  banks  were 
doing  business  under  the  act.  Following  is  the 
return:1 


Bank  of 
British 
North 
America 

Molsons' 
Bank, 
Montreal 

Niagara 
District 
Bank,  St. 
Catherines 

Zimmer 
man 
Bank, 
Clinton 

Total 

Capital    in     Provincial 
Debentures  deposited 
with    the    Receiver- 
General       

£ 
162,125 

£ 
50  000 

£ 
50  000 

£ 
25  000 

£ 
°87  195 

Amount    of    registered 
notes  outstanding  and 
delivered  to  the  banks 
by  the  Inspector-  Gen 
eral      

153  750 

50  000 

49  999 

24  500 

278  249 

Circulation           .   . 

37'861 

46  lb'9 

22  000 

Liabilities,       including 
circulation  

85  446 

67,615 

29,321 

Assets  

136  840 

101  642 

49,931 

Public  Accounts,  Province  of  Canada,  1854,  p.  225. 


Statistical  Vieiu  of  the  Free  Banks 


149 


The  next  year  operations  reached  the  highest  figure 
in  the  whole  history,  though  only  four  banks  appear 
in  the  statement.1 


Bank  of 
B.  N. 

America 

Mol  sons' 
Bank 

Niagara 
District 
Bank 

Zimmer 
man 
Bank 

Total 

Capital     in    Provincial 
Debentures  deposited 
with     the    Receiver- 
General    .    

£ 

170,708 
169,750 

£ 

50,000 

49,794 
24,332 
24,332 
79,100 

£ 

50,000 

49,999 
69,  050  2 
77,761 
133,285 

£ 

40,000 

40,000 
40,000 
48,817 
54,585 

£ 

310,708 
309,549 

Registered 
standing.  . 

notes    out- 

Circulation. 
Liabilities.  . 

Assets 

After  1855  there  was  a  steady  falling  off  in  the 
amount  of  securities  deposited,  notes  outstanding 
against  them,  and  notes  in  circulation.  In  the  state 
ment  of  1856  the  Provincial  Bank  and  the  Bank  of 
the  County  of  Elgin  first  appear,  the  former  with  a 
deposit  of  securities  for  §120,000  and  notes  for  the 
same  amount,  the  latter  with  securities  for  $100,000 
and  notes  for  $79,950.  The  Molsons',  Niagara  Dis 
trict  and  Zimmerman  banks,  which  were  chartered 
in  1855,  appear  to  have  been  retiring  their  secured 
notes.  The  total  bond  deposits  are  $1,114,633.33 
(£278,658),  and  notes  outstanding  $1,080,684  (£270,- 
171).3  In  1857  the  figures  have  fallen  to  $770,319.33 
and  $769,730. 4  In  1858  they  are  $730,503.33  and 
$729,531,  and  the  Molsons'  and  Zimmerman  banks 
disappear  from  the  list.  In  1859  the  bond  deposits 
are  $730,503.33  and  notes  outstanding,  $699,531;  in 

Public  Accounts,  Province  of  Canada,  1855,  p.  264. 

2  Also  issues  under  charter. 

3  Ibid,  1856,  p.  237. 

4lbid,  1857,  part  ii,  pp.  94,  95. 


150  The  Canadian  Banking  System,  1817-1890 

1860,  $562,603.33  and  $495,631,  of  which  the  British 
Bank  stands  for  $440,933.33  and  $373,964,  about 
$100,000  less  than  in  the  statements  for  1857  to 
1859. 1 

By  December,  1861,  the  Niagara  District  Bank 
had  nearly  withdrawn  its  provincial  securities,  and 
the  Provincial  and  County  of  Elgin  banks  had  only 
$2,000  and  $20,440  of  bonds,  respectively,  on  deposit. - 
At  the  end  of  1862  the  British  Bank  held  securities  for 
$436,933.33;  its  registered  notes  amounted  to  $336,- 
964,  of  which  $130,505  were  in  circulation.3  But  the 
Provincial  Bank  had  deposits  and  circulation  of  only 
$9,729,  and  the  Bank  of  the  County  of  Elgin  had 
disappeared  both  from  the  government  statement 
and  the  world  of  business.  To  all  intents  and  pur 
poses,  free  banking  in  Canada  had  run  its  course. 


§27 REPEAL  OF  THE  ACT  TO  ESTABLISH  FREEDOM 

OF  BANKING,  AND  DISAPPEARANCE  OF  THE  BANKS 
ORGANIZED  UNDER  IT 

The  failure  of  the  system  had  received  the  atten 
tion  of  the  Legislative  Assembly  at  least  five  years 
before.  On  March  6,  1857,  the  Hon.  William  Cayley 
introduced  a  bill  to  discontinue  the  incorporation  of 
joint-stock  banks  and  the  issue  of  registered  notes. 
The  merchants  and  monied  men  of  the  province  were 
generally  in  favor  of  the  old  chartered  system,  he 
said,  and  even  in  1855,  the  Assembly  had  decided 
to  perpetuate  it.  Its  decided  superiority  had  been 
shown  by  the  action  of  the  three  banks  which  had 

1  Public  Accounts,  Province  of  Canada,  I860,  part  ii,  p.  88. 
2 Ibid,  1861,  part  ii,  p.  94. 
9 Ibid,  1862,  part  ii,  p.  96. 


Repeal  of  Act  to  Establish  Freedom  of  Banking       151 

retired  their  registered  notes  and  continued  their 
business  under  charters.1  Wm.  Hamilton  Merritt 
was  still  in  the  Assembly,  and  in  reaffirming  his 
responsibility  for  the  first  free  banking  act,  he  de 
clared  with  a  lofty  disdain  of  the  facts,  that  it  was 
the  "best  system  adopted  in  any  country  from  the 
beginning  of  the  world  to  the  present  time."  "The 
sole  cause  of  its  being  inoperative  in  Canada,"'  he 
contended,  "was  that  it  had  not  been  honestly  carried 
out."2  Mr.  Cayley's  bill  did  not  come  up  for  the 
third  reading,  for  what  reason  the  debates  give  no 
evidence. 

The  Minister  of  Finance,  the  Hon.  A.  T.  Gait,  pro 
posed  the  repeal  of  the  law  in  1860,  but  the  other 
proposals  to  which  this  was  coupled  were  so  radical 
and  far-reaching  that  action  upon  the  whole  group 
was  indefinitely  postponed.3  Six  years  after  this, 
and  sixteen  years  after  its  first  passing,  the  "Act  to 
Establish  Freedom  of  Banking"  was  finally  repealed 
by  the  Provincial  Note  Act  of  1866.  (29-30  Vic., 
cap.  10,  §16.) 

Six  banks  in  all  had  taken  advantange  of  the  act.  ; 
To  one  of  these,  the  Bank  of  British  North  America, 
the  privileges  acquired  under  the  act  were  doubtless 
of  considerable  value.  The  others  did  not  thrive. 
Two  of  the  companies  working  solely  under  the  free 
banking  laws  wearily  struggled  for  three  years  (1856 
to  1858)  against  the  competition  and  prestige  of  the 
chartered  banks,  and  then  began  to  retire  their  issues 
and  wind  up  their  business.  The. three  banks  earliest 
started  under  this  act  soon  applied  for  charters  and 
secured  them.  (18  Vic.,  cap.  202-204.) 

Toronto  Globe,  7th  March,  1857. 

2  Ibid. 

Thompson's  "  Mirror  of  Parliament,"  1860,  p.  22  et  seq. 


152  The  Canadian  Banking  System,  1817-1890 

Of  these,  the  Zimmerman  Bank  had  the  shortest 
life.  Founded  in  1854  by  a  person  of  means,  it  was 
to  an  unusual  degree  the  creature  of  one  man.  It 
seems  to  have  been  well  and  honorably  managed  by 
the  capitalist  whose  name  it  bore,  but  after  his  death 
in  December,  1857,  the  notes  and  debts  of  the  bank 
were  redeemed  by  his  executors,  and  the  stock  and 
plates  transferred  to  a  Chicago  firm  of  the  name  of 
Hubbard  &  Co.  In  1858  the  charter  of  1855  was 
amended  by  changing  the  name  of  the  institution  to 
the  "Bank  of  Clifton,"  and  extending  the  time  for 
the  subscription  and  payment  in  full  of  its  capital 
stock.  (22  Vic.,  cap.  129.)  The  extraordinary  priv 
ilege  "that  the  bank  notes  and  bills  in  circulation 
shall  be  of  whatsoever  value  the  directors  shall  think 
fit  to  issue  the  same,  but  none  shall  be  under  the 
value  of  five  shillings  ($1),"  was  a  feature  of  the 
amended  charter.  In  1863  its  charter  was  repealed 
for  reasons  which  will  presently  appear.  (27  Vic., 
cap.  45.) 

The  Bank  of  the  Niagara  District,  with  its  head 
office  in  St.  Catharines,  Canada  West,  found  difficulty 
from  the  first  in  securing  the  capital  required  by  its 
charter.  The  act  of  1855  required  subscription  and 
payment  in  full  of  the  million  dollars  in  five  years. 
In  1857  an  indulgent  Assembly  extended  the  term  to 
1861;  in  1861  to  1866;  in  1863  the  capital  stock  re 
quirement  was  reduced  to  $400,000,  and  the  time  for 
paying  it  up  extended  to  1865.  The  bank  had  a  fairly 
successful  career  until  it  suffered  large  losses  through 
the  failures  of  Jay  Cooke  &  Co.  and  others  in  1873. 
Hardly  able  longer  to  carry  on  an  independent  busi 
ness,  it  was  amalgamated  early  in  1875  with  the  Im 
perial  Bank  of  Canada.  The  shares  of  the  Niagara 


Amendment  of  Bank  Charters  153 

District  Bank  were  exchanged  for  those  of  the  Impe 
rial,  according  to  the  relative  value  of  the  two  stocks, 
and  thereafter  the  former  bank  disappeared  as  a  sep 
arate  institution. 

Out  of  the  five  originally  "free  banks,"  but  one, 
the  Molsons'  Bank,  of  Montreal,  has  survived,  and  is 
now  an  institution  of  standing  and  importance. 


§28. CONTINUATION       AND       AMENDMENT      OF      BANK 

CHARTERS 

As  early  as  November,  1854,  there  came  before  the 
legislature  the  question  of  permitting  the  chartered 
banks  to  increase  their  capital  stocks.  In  this  con 
nection  Mr.  Francis  Hincks  admitted  that  the  public 
had  not  shown  any  great  disposition  to  take  advan 
tage  of  the  free  banking  law.  He  said  further  : 

First.  He  thought  that  the  public  wanted  a  large  increase  of 
banking  capital. 

Second.  There  was  not  money  enough  in  Canada  to  furnish  that 
capital. 

Third.  The  country  must  get  this  capital  from  foreigners,  and  the 
people  of  Canada  would  have  to  consult  foreigners  as  to  the  man 
ner  in  which  it  should  be  done. 

Fourth.  The  country  knew  that  no  English  capitalist  was  disposed 
to  furnish  money  to  Canada  through  the  agency  of  private  banks.. 
But  English  capitalists  would  recognize  the  large  chartered  banks, 
because  these  banks  had  been  known  for  many  years  as  a  safe  means 
of  investing  capital.  *  *  *  Capitalists  had  confidence  in  them, 
but  they  would  not  have  confidence  in  private  banks  established 
under  a  new  banking  system.  If  the  people  wanted  to  increase 
their  banking  capital  they  must  do  so  through  the  existing  banks. 

The  question  as  thus  presented  was  in  essence  the 
alternative  whether  or  no  to  retain  the  old  system 
and  give  up  the  new.  Banks  with  a  "  secured  "  cir 
culation  cannot  long  survive,  in  a  time  of  specie  pay 
ments,  the  competition  of  banks  issuing  notes  upon 


154  The  Canadian  Banking  Sijstem,  1817-3890 

their  general  credit.  They  have  not  the  earning 
power  to  maintain  the  contest  on  equal  terms.  This 
principle  was  illustrated  in  Massachusetts,  it  was 
acknowledged  in  New  York,1  it  was  recognized  in  the 
United  States,  it  has  been  proved  in  Canada.  After 
1854  the  fate  of  the  free  banks  was  inevitable;  the 
Assembly  decided  not  to  give  up  the  chartered  system 
which  had  served  so  well. 

Accordingly  bills  were  passed  permitting  additions 
to  capital  stock  amounting  to  £2,010,000  for  the  six 
banks  who  applied  (18  Vic.  cap.  38  to  42,  inclusive). 
A  few  amendments  were  added  to  the  charters.  The 
Bank  of  Montreal,  e.  g.,  taking  warning  from  a  case 
decided  shortly  before,2  secured  the  right  to  hold 
mortgages  on  ships,  steamships  and  other  vessels  by 
way  of  additional  security.  The  shares  necessary  to 
qualify  as  a  director  were  raised  to  twenty,  and  dis 
counts  bearing  names  of  directors  were  limited  to  a 
tenth  of  the  total  discounts.  Provisions  permitting 
the  transfer  of  shares  and  the  payment  of  dividends 
in  Great  Britain  were  included  in  most  of  the  acts. 
Ostensibly  as  a  security  to  the  public,  really  as  a 
brace  to  the  debenture  market,  all  the  banks  were 

JCf.  Mr.  Fillmore's  remark:  "It  cannot  be  expected  that  bank 
ing  under  this  (the  free)  system  will  be  as  profitable  as  under  the 
Safety  Fund  system."  Report  of  the  Comptroller  at  N.  Y.,  1849, 
p.  57.  It  will  be  remembered  that  the  latter  system,  the  banks  of 
which  had  a  privilege  of  issue  similar  to  that  of  the  Canadian  char 
tered  banks,  disappeared  from  the  state,  not  through  the  action  of 
competition,  but  because  the  state  ceased  to  grant  charters  and  those 
expiring  after  1849  were  not  renewed.  The  banks  were  forced  to 
reorganize  under  the  general  banking  law  or  go  into  liquidation. 
The  principle  referred  to  in  the  text  received  most  striking  recogni 
tion  by  the  United  States  in  the  10  per  cent,  tax  upon  state  bank 
notes  imposed  in  1865,  13  IT.  S.  Statutes  at  Large,  p.  469. 

2 McDonald  vs.  the  Bank  of  U.  C.,  U.  C.  Q.  B.,  Hilary  Term,  1P> 
Vic.,  p.  264. 


Amendment  of  Bank  Charters  155 

required,  in  case  they  availed  themselves  of  the  per 
mission  to  increase  their  capitals,  to  invest  one- tenth 
of  their  paid-up  capitals  in  debentures  of  the  province 
or  of  the  Consolidated  Municipal  Loan  Fund.  The 
charters  were  continued  to  the  1st  January,  1870,  and 
the  end  of  the  then  next  session  of  Parliament. 

Again  in  1855,  when  the  tide  of  sudden  and  re 
markable  prosperity  which  followed  the  reciprocity 
treaty  of  1854  was  beginning,  the  legislature  decided 
to  increase  the  number  of  chartered  banks.  The 
Molsons',  Zimmerman,  Niagara  District,  and  Eastern 
Townships  Banks  were  incorporated  with  authorized 
capitals  of  £250,000  each,  £50,000  to  be  paid  in  each 
case  before  the  bank  should  begin  business,  and  the 
whole  in  five  years.  The  St,  Francis  Bank  was  char 
tered  with  a  capital  stock  of  £100,000,  and  the  Bank 
of  Toronto  with  £500,000.  In  these  charters  it  was 
provided  that,  instead  of  voting  by  scale,  the  share 
holders  should  have  as  many  votes  as  shares.  But 
in  the  acts  to  amend  and  consolidate  the  charters  of 
the  Bank  of  Montreal,  Bank  of  Upper  Canada,  and 
Commercial  Bank,  passed  in  1856  at  the  request  of 
these  corporations,  the  old  voting  scale  was  retained. 
(19  Vic.,  cap.  76,  120,  121.)  The  Quebec  Bank 
obtained  a  similar  act  in  1858  (22  Vic.,  cap.  127);  the 
City  Bank  in  1863  (27  Vic.,  cap.  41).  The  directors 
were  in  each  case  limited  to  one-twentieth  of  the 
total  discounts.  By  another  act  of  1856  chartered 
banks  were  permitted  to  charge  not  more  than  one- 
half  of  one  per  cent,  on  ninety-day  paper,  in  addition 
to  the  legal  rate  of  discount,  for  the  expenses  of 
agency  and  collection,  when  the  security  was  paya 
ble  at  a  place  different  from  that  where  it  was  dis 
counted.  (19  Vic.,  cap.  48.) 


156  The  Canadian  Banking  System,  1817-1890 

Penalties  upon  usury  had  been  abolished  in  1858 
by  a  law  according  to  which  contracts  and  securities 
were  to  be  void  with  respect  only  to  the  excess  of 
interest  above  six  per  cent.  (16  Vic.,  cap.  80.)  But 
the  act  did  not  apply  to  the  banks  or  to  the  corpo 
rations,  such  as  loan  companies  or  building  societies, 
authorized  to  borrow  or  lend  at  a  higher  rate.  Until 
1858,  banks  taking  or  accepting  or  receiving  the  rates 
higher  than  six  per  cent,  were  liable  to  forfeit  treble 
the  value  of  the  money  lent  or  bargained  for,  half  to 
the  crown  and  half  to  the  person  suing  for  the  penalty. 
The  act  22  Vic.,  cap.  -85,  however,  permitted,  in  gen 
eral,  that  any  rate  of  interest  agreed  upon  might  be 
exacted,  but  prohibited  the  banks  from  taking  or 
stipulating  for  a  higher  rate  than  seven  per  cent,  per 
annum.  When  the  paper  discounted  was  payable  at 
another  of  the  bank's  own  offices,  the  charges  for 
agency  and  collection  on  paper  payable  at  another 
place  than  that  where  it  was  discounted,  were  reduced 
for  short  time  discounts  to  correspond  with  the  rate 
of  one-half  of  one  per  cent,  for  securities  payable  in 
90  days. 

In  1859  another  general  act  applying  to  the  char 
tered  banks  was  passed  for  the  avowed  purpose  of 
granting  additional  facilities  in  commercial  transac 
tions.  The  measure  had  been  strongly  urged  by  the 
banks.1  It  was  the  first  step  of  the  legislation,  after 
wards  much  developed,  enabling  the  chartered  banks, 
in  discounting  bills  of  exchange  or  notes,  to  take  as 
collateral  security  bills  of  lading,  specifications  of 
timber,  or  receipts  given  by  carriers,  whether  on  land 

1  Journal,  Can.,  1859,  Appendix  no.  67,  Evidence  of  the  Bank  of 
U.C.,  Bank  of  Montreal,  Bank  of  B.  N.  America  and  Commercial 
Bank. 


Amendment  of  Bank  Charters  157 

or  water,  keepers  of  coves,  wharfingers  and  ware 
housemen.  The  banks  were  empowered  to  acquire 
title  to  the  grains,  goods,  wares  or  merchandise  des 
cribed  in  the  face  of  the  instrument,  by  indorsement 
of  the  owner  or  person  entitled  to  receive  them,  sub 
ject,  of  course,  to  the  right  of  the  indorser,  upon  his 
paying  the  debt,  to  have  the  title  re-transferred. 

In  case  the  debt  were  not  paid  when  due,  they  were 
authorized  to  sell  the  commodities,  deduct  their  claim, 
costs  and  interest,  and  return  the  remaining  proceeds, 
if  any,  to  the  indorser.  But  no  such  transfer  of  title 
was  permitted  unless  the  bill,  or  note,  or  debt  was 
negotiated  at  the  same  time  with  the  indorsement  of 
the  collateral  security.  The  bank  might  not  hold  the 
goods  for  more  than  six  calendar  months.  In  case 
they  were  to  be  sold,  it  was  obliged  to  give  ten  days' 
notice  to  the  indorser.  The  important  restrictions 
were  the  last  two  but  one.  These,  it  was  believed, 
were  sufficient  to  keep  the  banks  from  engaging  in 
trade  or  risking  their  capital  by  speculative  invest 
ments  in  graded  merchandise. 

Seven  more  bank  charters  were  added  to  the  list  in 
1856  and  1857.  The  authorized  stocks  amounted  to 
£2,966,666  currency,  thus  making  a  total  of  twelve 
banks  incorporated  between  1855  and  1857  inclusive, 
and  of  £6,326,666  currency  added  to  the  authorized 
banking  capital  of  the  province.  This  was  more  than 
double  the  total  paid-up  capital  of  the  banks  in  1851, 
and  nearly  equal  to  their  actual  capital  in  1861. 
T^hese  figures  indicate  the  manner  in  which  the  ex 
pansion  and  speculative  movements  were  affecting 
people  and  legislature.  Events  soon  proved  that  so 
many  banks  were  not  needed.  The  Union  Bank  and 
St.  Francis  Bank  never  began  business,  an&  three 


158  The  Canadian  Banking  Si/stem,  1817-1890 

charters  granted  in  this  period  were  repealed  in 
1863,  the  banks  having  failed  to  fulfil  the  duties  re 
quired  by  law.  For  the  banks  which  managed  to 
survive,  the  legislature  was  obliged  to  relax  its  policy 
of  requiring  from  each  bank  a  capital  stock  of  £250,- 
000,  and  greatly  to  extend  the  time  for  paying  up  the 
reduced  stocks. 


§29.— 1857-1863. 

One  explanation  of  the  large  increase  in  banks 
has  already  been  given  in  the  mention  of  the  great 
agricultural  and  commercial  changes,  which  were 
plainly  apparent  in  1855.  The  Reciprocity  Treaty, 
in  furnishing  the  Canadians  with  a  large  market, 
easily  reached,  for  the  products  of  their  fisheries, 
farms  and  forests,  was  undoubtedly  a  powerful  fac 
tor  in  the  new  prosperity.  But  long  before  the  suc 
cess  of  Lord  Elgin's  diplomacy,  foreign  capital  was 
beginning  to  come  into  the  colony,  agriculture  was 
reviving  in  the  West,  population  was  increasing  rap 
idly,  vast  public  works  were  started,  large  additions 
to  the  railway  system  were  commenced.1  Govern 
ment  assistance  was  granted  to  the  trunk  lines.  The 
Grand  Trunk  Railway,  the  Great  Western  Railway, 
and  some  eastern  roads  together  effected  an  increase 
of  1,563  miles  of  road  between  1852  and  1858.  The 
railway  mileage  of  Canada  was  increased  over  1,500 
per  cent.  The  better  prices  for  produce  obtained 
after  the  treaty  turned  the  attention  of  investors 
to  land  speculation.  Excessive  prices  were  given 
for  wild  lands.  Schemes  for  new  villages  and  towns 

1CL  Bankers1  Magazine,  vol.  ii,  p.  441;  vol.  xii,  p.  368;  vol.  xiii,  p. 
538. 


1857-1863  159 

were  everywhere  afloat.  Harvests  were  abundant 
in  1853,  1854,  1855;  the  price  of  breadstuffs  high; 
and  yet  in  1857  the  farmers  were  more  deeply  in 
debt  than  in  1853.  They  had  sold  for  cash  and 
bought  largely  on  credit.  Considerable  additions 
were  made  to  improved  farming  lands,  but  many 
tied  up  their  capital  by  speculating  in  unproduc 
tive  real  estate.  Trade  was  stimulated  to  an  un 
precedented  degree,  and  bank  accommodations 
stretched  to  the  utmost  limit.  Excessive  and  ex 
travagant  importations  occurred  in  1856  and  1857. 
The  Municipal  Loan  Fund,  a  scheme  whereby  the 
province  guaranteed  the  borrowing  of  the  towns 
and  counties,  served  to  swell  the  inflation.  The 
pressure  for  money  was  very  strong  in  1856;  there 
was  a  prospect  that  both  public  works  and  railway 
expenditures  would  soon  be  ceased. 

Then  came  the  bad  crop  of  1857.  The  commercial 
crisis  in  Great  Britain,  Europe  and  the  United  States 
was  at  its  height.  The  suspension  of  specie  pay 
ments  in  New  York  on  the  14th  October  compelled 
the  Canadian  banks  to  guard  against  an  extraordi 
nary  drain  of  gold.  They  ceased  discounting.  Some 
five  or  six  weeks  elapsed  before  they  could  safely 
grant  the  advances  necessary  to  bring  the  crops  of 
the  year  to  market.1  This  delay  of  produce  opera 
tions  alone  caused  great  loss.  As  a  result  of  the 
crisis  elsewhere  the  Canadians  next  suffered  a 
heavy  falling  off  in  the  demand  for  their  grain, 
ashes,  timber,  etc.  Then  followed  numerous  com 
mercial  failures,  a  fall  in  all  values,  the  collapse  of 
the  real  estate  boom,  a  contraction  of  credits,  a  sec- 

1  Thompson's  "Mirror  of  Parliament,"  1860,  27th  March. 


160  The  Canadian  Banking  System,  1817-1890 

ond  bad  harvest  in  1858,  and  two  years  of  black 
depression.1 

But  in  1859  the  Provincial  Parliament  was  again 
addressed  by  petitioners  for  new  bank  charters.  To 
secure  evidence  by  which  to  guide  the  policy  of  the 
House  with  respect  to  banking,  a  select  committee 
on  banking  and  currency  was  struck  on  the  motion 
of  the  Minister  of  Finance,  Mr.  A.  T.  Gait.  In  the 
evidence  presented  by  this  committee,  and  chiefly 
obtained  from  the  leading  bankers,  there  was  much 
pointed  criticism  of  the  existing  banking  system. 
It  was  objected,  e.  g.,  that  the  law  had  allowed  the 
creation  of  banking  capital  beyond  the  needs  of  the 
country.  The  privilege  of  circulation  was  conferred 
without  the  necessary  safeguard.  A  dishonest  bank 
could  begin  business  merely  by  investing  £10,000  in 
debentures;  there  were  no  means  to  assure  the  full 
payment  of  the  required  capital,  and  this  minimum 
was  often  too  small.  There  was  no  obligation  to 
publish  the  names  of  stockholders.  The  plan  of  lim 
iting  circulation  to  the  paid-in  capital,  plus  specie 
and  debentures,  was  delusive,  as  either  of  the  latter 
could  be  gotten  only  by  purchase  with  capital  or  de 
posits.  If  capital  were  used,  then  so  much  of  the 
capital  was  displaced.  The  law  thus  treated  as  dis 
tinct  from  capital  what  was  really  a  part  of  it.  If 
deposits  were  used  then  the  bank  was  allowed  to  base 
an  additional  liability  upon  what  it .  was  already 
bound  to  pay. 

There  was  insufficient  motive  provided  for  an  active 
interest  on  the  part  of  the  directors.  It  was  urged 

Journal,  Can.,  1859,  Appendix  no.  07,  Report  and  Proceedings  of 
the  Committee  on  Banking  and  Currency,  is  the  leading  authority 
for  the  facts  detailed  in  the  last  two  paragraphs. 


1857-1863  161 

that  a  larger  holding  of  paid-up  stock  should  be  ex 
acted  of  them. 

The  effects  of  the  crisis  had  been  aggravated  some 
what  by  the  restriction  on  the  rate  of  discount 
chargeable  by  the  banks.  The  banks  could  give  no 
warning  of  approaching  difficulty  by  raising  the  rate. 
It  was  necessary  peremptorily  to  refuse  discounts  to 
some  applicants  and  to  confine  their  accommodations, 
as  far  as  possible,  to  wealthy  and  independent  custo 
mers,  andj&hose  with  " valuable  accounts,"  i.  e., 
customers^-om  whom  incidental  advantages  of  ex 
change,  agency  charges,  large  deposits,  undoubted 
security,  and  the  like  might  be  derived.  The  result 
was  that  inferior  customers  and  those  who,  very  pos 
sibly,  most  needed  the  assistance  to  tide  them  over, 
were  the  least  likely  to  get  it. 

But  it  also  appeared  that  in  every  district  of  any 
importance  the  banks  had  planted  agencies  and 
brought  to  the  door  of  such  communities  liberal  ad 
vantages,  with  the  power  and  security  of  the  same 
large  monied  corporations  which  served  the  cities. 
The  branches  had  not  indeed  quieted  the  demand  for 
small  banks.  But  small  banks,  so  the  experience  of 
the  United  States  seemed  to  teach,  were  unsafe. 
Besides,  it  was  perceived  that  the  cry  for  small 
banks  was  one  seldom  voiced  by  the  lending  part  of 
the  community.  As  a  province,  Canada  very  pro 
perly  refused  the  eternal  task  of  quieting  borrowers' 
claims.  The  minister  himself  acknowledged  that  as 
a  rule  the  banks  had  been  well  and  wisely  managed.1 
During  the  panic  in  the  United  States  Canadian  notes 
were  received  there  with  the  same  readiness  as  specie 
in  payment  of  notes  which  the  local  banks  were 

Thompson's  "  Mirror  of  Parliament,"  1860,  p.  21. 
11 


162  The  Canadian  Banking  System,  1817-1890 

called  on  to  redeem.1  And  yet  the  minister  was  not 
satisfied.  He  had  used  the  committee  to  conceal  the 
purpose  which  he  revealed  in  1860. 

This  was  the  establishment  of 'a  bank  of  issue,  or 
treasury  department,  for  which  he  introduced  reso 
lutions  on  the  27th  March.  He  wished,  he  said,  "to 
put  the  currency  on  a  perfectly  sure  and  safe  footing, 
by  separating  it  from  the  banking  interest,  and  by 
removing  it  from  the  possible  suspicion  of  being 
affected  by  political  exigencies."  But  IIJL  solicitude 
was  insincere,  his  monetary  theories  f alse¥ft  His  ulti 
mate  object  was  assistance  to  the  provincial  finances; 
his  proposed  means,  the  emission  of  legal  tender, 
though  convertible,  government  notes  as  the  sole 
currency.  The  resolutions  found  slight  approval,  as 
the  order  for  their  consideration  in  committee  was 
discharged  the  18th  May.2  They  are  interesting  now 
only  as  the  forerunner  of  the  Provincial  Note  Act  of 
1866,  the  provisions  of  which  were  largely  due  to  the 
monetary  fallacies  and  financial  exigencies  of  the 
same  minister. 

The  policy  of  the  legislature  was  steadily  to  extend 
the  system  of  chartered  banks  on  the  old  lines.  In 
1858  the  Bank  of  Canada  (afterwards  the  Canadian 
Bank  of  Commerce)  was  incorporated.  (22  Vic.,  cap. 
131.)  In  1859  three  charters  were  granted,  among 
them  that  of  La  Banque  Nationale,  situate  at  Quebec. 
(22  Vic.,  cap.  102-104,  2d  sess.)  In  1861  the  Mer 
chants'  Bank  and  La  Banque  Jacques  Cartier  were 
created  in  answer  to  the  petitions  of  Montreal  capi 
talists.  (24  Vic.,  cap.  89  and  90.)  The  Royal  Cana 
dian  Bank  was  chartered  in  1864,  the  Mechanics' 
Bank,  the  Union  Bank  of  Lower  Canada  and  one 

1  Journal,  Can.,  1859,  Appendix  no.  67. 

2  Journal  of  the  Legislative  Assembly  of  the  Province  of  Canada, 
1860,  pp.  114,  452. 


1857-1863 


163 


other  concern  in  1865,  and  two  more  still  in  1866. 
Fourteen  charters  and  amending  acts,  authorizing 
capital  for  $19,460,000,  were  the  record  for  the  nine 
years,  1858  to  1866.  Payments  amounting  to  $1,475,- 
000  were  required  on  the  twelve  charters  before  the 
banks  could  begin  business.1  Only  the  seven  banks 
named  in  the  text  took  advantage  of  their  charters 
and  began  a  corporate  life  of  some  duration.  The 
charters  of  the  Banks  of  Clifton  and  Western  Canada, 
like  those  of  the  International  and  Colonial  Banks, 
were  repealed  in  1863.  The  International  and  Colo 
nial  Banks  had  failed  in  1859,  without,  however,  in 
flicting  much  loss.2  All  had  suspended  their  payments 

1  After  1857  the  denominations  of  the  decimal  currency  are  used 
almost  exclusively  in  Canadian  legislation. 

-Thus  the  last  return  made  to  the  government  by  the  Zimmerman 
Bank  (changed  to  the  Bank  of  Clifton),  was  for  October,  1857;  of 
the  Colonial  and  International  Banks,  situate  at  Toronto  for  Octo 
ber,  1859: 


Average  of  the  Assets 
Zimmerman 
LIABILITIES                  Octk'l857 

and  Liab 

Colonial 
Bank,  for 
Sept.,  1859 

ilities  of  the 

International       wStern 

s«ni-    i«fiQ     i  Canada  for 
Sept.,ia           June,  186) 

Capital  stock  paid  in.. 

Notes  in  circulation.  .  . 
Balances  due  to  other 
banks  

$453,500 

$112,000 

$132,500         $101,750 

33,991 
27,711 
10,809 
99,200 

75,300 
3,061 
21,517 

119,021 
5,097 
9,968 

5,210 

Cash      deposited     not 
bearing  interest  
Cash   deposited    bear 
ing  interest  

$171.712 

$99,878  j     $134,087 

$106,960 

ASSETS 
Coin  and  bullion     .... 

$2,723 
1,463 
35,000 

936 
573 
596,559 

$18,769 
262 
13,200 

5,928 
54,713 
119,245 

$20,030 
2,423 
15,000 

9,990 
19,011 
201,875 

$1,115 
3,871 
12,000 

3,786 
25,000 
61,186 

Landed  property.  .  . 

Government  securities 
Notes  and  bills  of  other 
banks  

Balances    due     from 
other  banks  

Bills    and    notes    dis 
counted  . 

$636,254 

$212,118 

$268,331 

$106,960 

Vide  Canada  Gazette,  vol.  xvi,  p.  2,678;  vol.  xviii,  p.  2,497;  vol.  xx, 

The  Bank  of  Clifton,  as  such,  never  made  any  returns  to  the  gov 
ernment.     Hubbard,  of  Chicago,  was  succeede'd  by  one  Callaway, 


164          The  Canadian  Banking  System,  1817-1890 

and  discontinued  operations,  and  the  legislature 
then  deemed  it  advisable  to  prevent  their  resumption 
on  the  terms  and  conditions  embodied  in  their  char 
ters.  (27  Vic.,  cap.  45.) 

None  of  the  charters  granted  between  1858  and 
1866  permitted  the  beginning  of  business  with  less 
than  $400,000  capital  subscribed  and  $100,000  paid 
up.  As  evidence  of  its  bond  fide  payment,  it  was 
usually  required  that  before  the  new  bank  should 
issue  notes,  its  paid-in  capital  should  be  deposited,  as 
specie,  in  some  existing  chartered  bank  of  the  pro 
vince.  One  year  from  the  passing  of  the  act  was  the 
ordinary  time  in  which  a  charter  became  forfeited 
by  non-user.  In  some  cases  the  limit  of  one-fifth  the 
paid-in  capital  stock  was  imposed  upon  the  circula 
tion  of  notes  under  five  dollars  ;  in  others,  of  those 

formerly  of  Toronto,  as  president.  Some  circulation  for  its  notes 
was  obtained  in  the  Western  states  by  advertising  in  a  bank  note 
reporter  that  the  "  notes  of  the  Bank  of  Clifton,  incorporated  by 
the  Parliament  of  Canada,"  would  be  redeemed  at  a  broker's  office 
in  Chicago.  Enough  notes  were  paid  to  get  credence  for  the  state 
ment  and  then  the  supply  of  funds  was  stopped.  Over  $5,000  of 
the  paper  thus  repudiated  was  sent  to  Clifton,  but  there  was  no 
money  to  meet  it.  The  Bank  of  Western  Canada  was  controlled  by 
one  Paddock,  a  New  York  tavern  keeper,  who,  by  paying  for  his 
stock,  secured  a  respectable  old  man  at  Clifton  to  act  the  stool 
pigeon  as  president  of  the  bank,  but  he  had  no  check  on  the  issue 
of  notes.  Efforts  were  made  to  float  them  in  Illinois,  Wisconsin 
and  Kansas,  with  some  success,  but  the  notes  were  never  redeemed. 
Reed,  of  Lockport,  N.  Y.,  a  man  of  bad  repute,  owned  nearly  the 
whole  stock  of  the  International  Bank  in  Toronto  when  it  failed, 
and  was  connected  also  with  the  Bank  of  Clifton. 

A  committee  of  the  Assembly  reported  in  1862  that  the  position  of 
the  two  banks  first  named  was  such  that  it  was  discreditable  to  the 
legislature  to  allow  their  charters  to  remain  in  existence  any  longer. 
Action  was  postponed,  however,  till  a  committee  of  1863  reported 
that  "  considerations  of  public  policy  imperatively  demand  the  im 
mediate  repeal  of  the  charters  of  these  four  banks."  Vide  Journal, 
Canada,  1863,  p.  109;  ibid,  1862,  Appendix  no.  4. 


Failure  of  the  Bank  of  Upper  Canada  165 

under  four  dollars.  Differences  are  also  to  be  noted 
in  the  application  of  a  scale,  or  the  rule  of  one  for 
each  share,  to  the  voting  of  the  shareholders.  In 
requirements  of  larger  stock  investments  by  the 
directors,  proof  that  capital  is  actually  paid  in,  and 
the  like,  the  charters  embody  important  corrections 
suggested  to  the  committee  of  1859.  It  hardly  need 
be  said  that  they  contained  all  the  safeguards 
and  provisions  previously  adopted,  in  compliance 
either  with  imperial  recommendations  or  the  teach 
ings  of  colonial  experience. 

It  was  impossible,  even  for  the  seven  banks  finally 
started,  to  secure  the  payment  of  their  capitals  in  the 
time  limited  by  their  charters.  The  Parliament  ac 
cordingly  consented  to  relax  these  requirements  in 
a  manner  very  like  that  in  which  we  have  seen  it 
indulge  the  Niagara  District  Bank.  The  laws  of 
1858  had  contained  no  less  than  five  extensions  of 
the  times  prescribed  for  banks  previously  chartered, 
to  secure  full  subscription  and  payment  of  their 
stocks.  And  similarly,  between  1862  and  1865,  the 
Merchants'  Bank,  the  Canadian  Bank  of  Commerce, 
the  Eastern  Townships  Bank  and  the  Quebec  Bank 
were  all  obliged  to  secure  extensions  of  the  periods 
in  which  the  payment  of  their  original  or  additional 
capitals  was  required  by  the  acts  authorizing  them. 


§30. FAILURE  OF  THE  BANK  OF  UPPER  CANADA 

The  period  between  1852  and  1857  was  a  time  not 
only  of  great  economic  expansion,  but  also  of  great 
economic  change.  The  development  had  been  over- 
discounted  by  sanguine  Canadians,  and  hence  values 
collapsed  when  the  crisis  arrived.  Of  the  long  de 
pression  that  followed  a  leading  cause  must  be 


166  The  Canadian  Banking  System,  1817-1890 

sought  in  the  slowness  and  difficulty  of  the  adjust 
ment  to  new  conditions  brought  about  by  the  intro 
duction  of  railways,  extension  of  public  works,  roads 
and  bridges,  shifting  of  the  routes  of  commerce  and 
alterations  in  the  chief  industrial  pursuits  of  impor 
tant  districts.  The  statement  may  be  made  with 
especial  force  of  Upper  Canada,  or  Canada  West, 
where  the  real  estate  excitement  had  been  higher 
and  the  increase  of  railways  greater.  Many  of  the 
towns  placed  for  water  communication  were  left  on 
one  side  by  the  railways  or  deprived  of  their  impor 
tance.  Cobourg,  Sandwich,  Dundas,  Burlington, 
Kingston,  Niagara,  Brockville  and  others,  once  the 
centers  of  flourishing  trade,  either  failed  to  recover 
from  the  depression  or  lost  heavily  to  more  favored 
situations.  Lumber  getting  and  real  estate  improve 
ment  were  pushed  backward  and  northward  to  make 
room  for  more  settled  industry. 

In  the  early  days  of  the  province  the  Bank  of 
Upper  Canada  had  been  the  provincial  bank.  It  had 
given  assistance,  comparatively  enormous,  to  the 
development  and  commerce  of  the  country.  Land 
was  then  the  single  valuable  security  possessed  by  its 
customers  in  any  quantity.  It  was  therefore  neces 
sarily  more  or  less  a  land  bank  in  a  disguised  form, 
although  in  their  ostensible  character  the  greater 
number  of  its  transactions  were  doubtless  legally  per 
missible.  Its  managers  and  clerks  were  often  British 
immigrants  who  lacked  the  intimate  knowlege  of 
Canadians  and  Canadian  trade  that  life-long  famili 
arity  would  have  given.  In  many  instances,  too, 
they  failed  to  exhibit  acquaintance  with  the  simplest 
of  banking  principles.  Discounts  were  freely  ex 
tended  to  lawyers  and  legislators,  the  gentry  and 
professions.  "Accommodation"  paper  was  common. 


Failure  of  the  Bank  of  Upper  Canada  167 

Loans  were  made  to  civil  servants  and  to  politicians. 
No  one  will  deny  that  the  bank  was  guilty  of  much 
bad  practice,  that  it  paid  high  rates  of  dividend  when 
it  could  ill  afford,  that  it  failed  to  write  off  accrued 
losses,  that  it  impaired  its  capital  by  extravagant 
bonuses,  that  its  internal  organization  was  defective? 
and  that  its  management  was  often  blind,  reckless 
and  ignorant. 

Still  the  bank  survived.  It  was  invested  with  the 
dignity,  it  enjoyed  the  prestige,  of  a  government 
institution.  Its  credit  was  always  high,  its '"green 
notes"  held  in  great  esteem.  Quantities  of  notes 
issued  twenty  years  before,  and  as  bright  as  they 
came  from  the  press,  were  found  in  due  time  stored 
away,  like  gold  itself,  in  the  chests  of  Canadian 
farmers.  For^  them  the  bank  was  as  the  Bank  of 
England.  A  position  in  its  service  was  a  post  of 
honor  and  consequence.  Its  name  was  the  very 
synonym  of  strength.  The  confidence  of  the  public 
was  reinforced  by  their  gratitude.  The  bank  had 
been  the  instrument  of  men  of  broad  ideas  and  large 
purpose,  ambitious,  enterprising,  hopeful  pioneers. 
The  good  they  did  lived  after  them,  but  at  the  time 
of  the  bank's  demise  it  had  not  reached  the  enjoy 
able  stage. 

Up  to  1857  the  Bank  of  Upper  Canada  had  grown 
steadily.  Dividends  of  6,  7,  7,  8,  8,  and  7  per  cent, 
were  paid  in  1852-1857.  The  capital  was  increased 
in  1855,  and  a  12£  per  cent,  bonus  paid  to  the  old 
shareholders.  In  1858  the  capital  paid-in  amounted 
to  $3,118,000.  The  dividend  that  year  was  8  per  cent, 
and  the  rest  was  reduced  but  $40,000,  to  meet  the 
losses  of  1857.  For  a  bank  which  had  worked  in  the 
midst  of  the  land  speculation,  had  undoubtedly 


168  The  Canadian  Banking  System,  1817-1890 

joined  in  it,  and  lost  heavily  when  property  taken  as 
additional  security  fell  to  the  lower  values,  this  was 
utterly  inadequate.1  Their  mistake  was  recognized 
by  the  directors  in  1861.  Thomas  G.  Ridout,  cashier 
since  1822,  retired,  and  Mr.  Robert  Cassells,  a  banker 
of  high  reputation  and  eminent  ability,  was  em 
ployed  at  a  salary  of  $10,000  per  annum,  in  the  hope 
that  he  would  succeed  in  saving  the  bank.  In  com 
pliance  with  his  suggestions,  permission  was  ob 
tained  of  the  legislature  to  reduce  the  paid-up  stock 
to  something  over  $1,900,000,  the  par  value  of  the 
paid-up  shares  from  $50  to  $30.  (25  Vic.,  cap.  63.) 
For  twelve  years  or  more  the  bank  had  kept  the 
government's  account.  During  this  time  it  was 
usually  a  considerable  debtor  to  the  Treasury.  But 
the  debt  to  the  government  was  fixed  by  an  Order- 
in-Council  of  the  12th  August,  1863*  at  $1,150,000, 
and  transferred  to  a  special  account.2  Some  slight 
general  deposits  were  allowed  to  remain,  but  most  of 
the  Treasury  balances  were,  by  November,  trans 
ferred  to  the  Bank  of  Montreal,  which  became  hence 
forth  the  government's  banker. 

The  deep  rooted  belief  in  the  bank  entertained  by 
the  public  was  still  strong,  but  after  1860  the  monthly 
returns  give  unmistakable  signs  of  retrogression  on 

1Twenty  years  and  more  after  the  event,  Senator  Alexander  re 
vealed  an  incident  in  further  explanation  of  the  bank's  losses.  In 
1858  or  1859  the  Grand  Trunk  Railway  Company  was  indebted  to  con 
tractors  to  the  extent  of  a  million  dollars.  To  enable  the  Company  to 
pay  these  claims  the  bank  was  induced  to  make  advances  of  that 
amount  on  two  bills  of  exchange  for  £100,000  each,  drawn  upon  the 
Railway  Company's  London  bankers,  the  Barings  and  Glyns.  These 
houses,  however,  had  closed  down  upon  the  company,  and  the  bills 
were  dishonored,  the  result  being  that  a  good  part  of  the  million 
was  wholly  lost.  Pebates  of  the  Senate  of  Canada,  1885,  p.  35. 

'Sessional  Papers,  Canada,  1867-68,  No.  27. 


Failure  of  the  Bank  of  Upper  Canada  169 

the  part  of  the  bank  itself.  The  general  business  had 
fallen  off  heavily  as  the  old  towns  in  which  the  bank 
was  established  lost  their  prosperity  to  the  centers 
growing  up  in  the  new  industrial  districts  and  along 
the  altered  routes  of  trade.  Another  cause  of  the 
reductions  is  to  be  found  in  the  efforts  of  the  new 
management  to  get  the  business  down  to  a  solid 
basis.  Its  circulation,  which  averaged  over  $2,100,- 
000  between  1857  and  1860,  fell  in  February,  1862,  to 
$1,696,000,  and  in  August,  1865.  to  $988,000.  Non- 
interest  bearing  deposits  dropped  from  $1,920,000  in 
February,  1862,  to  $640,000  in  August,  1865;  deposits 
at  interest  from  $2,644,000  to  $1,959,000;  discounts 
from  $6,186,000  to  $3,231,000;  but  the  landed  or  other 
property  of  the  bank  rose  from  $503,000  to  $1,473,000. 
In  this  last  item  we  find  the  prime  cause  of  the  trou 
ble,  the  collapse  of  1857-58,  in  the  real  estate  of  Can 
ada  West.1  Neither  in  1864  nor  in  1865  were  any 
dividends  paid.  The  task  of  saving  the  bank  was 
become  clearly  impossible;  some  of  the  assets  were 
worthless,  some  locked  up  in  land.  By  an  act 
approved  the  15th  August,  1866,  permission  was 
granted  further  to  reduce  the  capital  to  $1,000,000, 
in  fully  paid-up  shares  of  $20  each.  Before  this 
could  be  acted  upon,  the  bank  was  further  weakened 
by  the  withdrawal  of  deposits,  and  its  stock  fell  to  $3 
per  share.  The  loan  of  $100,000  obtained  from  the 
government  on  special  securities  in  the  first  fortnight 
of  September  was  of  slight  avail.2  On  the -18th  the  \ 
Bank  of  Upper  Canada  stopped  payment. 

On  the  12th  November  the  bank,  by  the  consent  of 
the  shareholders  in  general  meeting,  was  assigned  to 
trustees.  Previously  to  the  9th  of  the  same  month 

1  See  Note  1.  page  170. 

Sessional  Papers,  Canada,  1867-68,  No.  27. 


170  The  Canadian  Banking  System,  1817-1890 


xThe  course  of  the  bank's  business  can  best  be  judged  by  the 
following  table,  for  1857  to  1866,  compiled  from  th«  Canada  Gazette: 


aapun  papnjout 
you  jjirBq  aqj 
01  anp  s^qapaaqio 


£i£    raoai 

lo 
-<S 


.wqjo  jo  sniq  ao 
sa^ou 


aqi  jo 


ao    papuBi 


uoi[[nq  puB  utoo 


cc  <^  c:  x  c:  10  i  -  10  cr.  -r  x  ?  i  ic  :c  i^  cc  co  o  GO  >-O  c^i 

COl^Oii—  lCD'^l'tlrHr^--^t^GOlOCMC>OOOl^r-ilMCOCO 
^-  O  1^  C^l  t-  O  O5  <M  t^-  lO  (M  CO  CM  Tf  ?M  CO  (M  iO  GO  l^  1C  CO 


l^  ^H  OO  »O  O  •*  r^  l^-  CO  <M  <M  CO  t^  OO  to  (M  CO  >O 

O  »o  ®  t^  w  cc  as  ab  o  co  o  5s  »o  eo  10  co  co  c<i  w  I-H 

l^  CO  CO  CO  'CO  CO  (M  10  ^  Tfl  00  (M  -»H  ^H  r-l  " 


GCCO'tlOt^COaiO^QOCOTtiOO<Mr-lC;*^^I 

co  ic  cc  co  'M  o  o  oo  ^i  r^  cs  r^  o  o  GO  i>-  co  GO  co 


CO  rH  CO 
*"  C^l  CC  CS  ib  O  O-l  CO  CC  CC  CC 


CO  CO  'O  CO 
^r-H— i^HOOC0000505C50505 

CC  CC  CC  CO  (M  CM  Ol  (M  CM  <M  rH  ,H  — i  TH  TH 


co  o  ^i  Tti  »o  i  ^  oc  <M  o  T-H  o  co  co  co  -O  t^  t—  i  cc  r^  r^ 

r-i  CM  C^  CM  (M  CO  CO  rti  »-O  t^  CO  OO  Ci  (M  rfi  TJH  LC  O  CO  CO 


t>-  ec  i>.  to-  ec  10  as  co  ic 


.  CO  <M  O  O5  OC  -*  l^  C^l 

ICC400'—  ICOT—  iiOi—  i 


X)CCi—  i^<MO»OO<M 
t^  (M  Ci  CO  t-  C^l  CO  1C  O 


1C  CO  t^-  t^  CO  t^  t^  CO  CO  CO  CO  tC  lO  lO  ^t1  OO  CO  CO  CC 


pajisodap 


C^li—  (COOiCC»OClCOT—  i 
CO^fCCiOi—  lOOrH'^Ci 
(Mi—  it—  l0^t-~- 


C>tiiOi-HCOCOiOLOCOI>-'1^ 


iOiO 
1^-CO 


H-e 

aS 
si 

^o 


pa^isodap  qseo 


T—  iO5<Mt^G^lOQOCOJOOOCO»OiO 


CCCCC^CT.  COCO 
CiCOHHCOT—  II- 
t>-  t^-  rH  O7  TjH  -rf 


8ui 

^OU     UOTJ 

-«[noaio  in  saqiojsl 


LO^T—  (OOCiCOl^-'<^C<CCOt^.C<jTHl^.CCOiOOTfiQOCCHH 
<A  CO  OO  l^  CD  TH  O  I>-  CO  OO  C2  >C  O  T—  i  CC  OC  -f1  CO  lO  GO  TH  »O 
**  ft.  r^  (M  CO  T-I  00  (M  Ci  00  CO  CO  >0  CO  If5  rH  O  O^  O5  CO  00  I- 


ui  pn?d 


HH  o  OOHH  i^  o  cocoo  o  T-H  r-(M  oo  <M  co  coi 

OS  i-  1  i-i  CS1  N  CO  OO  CO  !>•  CO  O  i—  t  N  <N  CO  CO  CO  CO 


H^ 
OO 


os  a 

COCC 


Failure  of  the  Bank  of  Upper  Canada 


171 


reductions  from  the  average  liabilities  of  August  had 
been  effected  as  follows: 


(000.00  omitted) 


Notes  in  circulation 

Balances  due  to  other 
banks 

Deposits  not  bearing  in 
terest  

Deposits  bearing  interest 

Total.. 


1866 


Actual  condition, 
9th  Nov.,  1866 


$813                             $722 

416 

299 

571 
1,754 

j                          395 

(  Due  to  the  Gov't     1,149 

$3,555 

$2,566 

Reduction 

$91 
117 

781 


$989 


Which  was  evidently  provided  for  as  follows: 


Coin    and    Bullion,    or 

cash  in  banks $244 

Landed    or    other   pro 
perty  1,673 

Govt.  securities 196 

Notes  and  bills  of  other 

banks 61 

Balances  due  from  other 

banks.    26 

Notes  and  bills 

discounted..     $2,488 

Other   debts    due 

to  the  bank..       874 

3,362 


$5,565 


$42 

1,673 
17 


f  Bills  and 
judg 
ments.. $2, 225 

•{  Railway  & 
other 
bonds..  35 

t  Mortgages      62 

$2,322 


$202 


179 
61 
26 


1,040 


$4,056        !   $1,509 


The  statement  for  the  9th  November  may  be  taken 
very  nearly  to  represent  the  condition  of  the  bank  at 
the  time  of  its  failure.  Liquidation  of  the  estate 
proceeded  slowly.  In  December,  1867,  the  trustees 
were  incorporated,  and  provision  made  for  the  ap 
pointment  by  the  government  of  two  trustees,  to 
represent  the  interests  of  the  creditors,  and  of  one 
by  the  shareholders  to  act  in  their  behalf.  (31  Vic., 
cap.  17.)  The  three  new  trustees  took  hold  of  the 
estate  on  the  16th  March,  1868.  In  December,  they 
reported  that  no  steps  had  been  taken  to  enforce 
the  double  liability,  and  that  the  apparent  surplus 
of  assets  over  liabilities  had  been  reduced  from 


172  The  Canadian  Banking  System,  1817-1890 

$1,375,797  in  March  to  $477,161  on  the  81st  December, 
through  the  following  operations: 

Written  off  as  irrecoverable  debts $623,076  51 

Losses  on  lands  assigned  to  Glyn  &  Co.  and  sold  by  their 

Trustees  111,91887 

Net  loss  on  lands  sold  by  the  Bank  of  Upper  Canada 

Trustees 93,41183 

Sundry  items 70,228  34 

$898,635  55 

This  TOSS  had  been  incurred  in  realizing  about  $307,- 
998  upon  $1,266,633  of  the  assets  as  they  had  been 
valued  in  March.  It  was  expected  that  $1,019,000  of 
bills  and  judgments  would  produce  some  $513,000; 
that  real  estate  valued  at  $979,000  would  net  say 
$588,000.  A  deficiency  of  nearly  $500,000  would 
probably  occur,1  and  the  trustees  believed  that  the 
trust  could  not  be  profitably  closed  up  before  five 
years.  Meanwhile  it  was  costing  the  estate  $14,280 
a  year,  besides  the  interest  on  certain  outstanding 
debts. 

"No  creditor  of  the  bank  has  been  paid  the  amount 
of  his  claim,  either  in  full  or  in  part,  excepting  some 
trifling  sums  that  could  not  otherwise  be  disposed  of,' ' 
the  trustees  reported.  According  to  the  deed  of 
assignment,  they  were  compelled  to  receive  claims 
against  the  bank  at  their  full  value  in  payment  of 
debts  due  to  the  bank;  but  as  an  inducement  to  facil 
itate  the  negotiation  of  real  estate,  after  the  16th 
March,  1868,  claims  were  received  at  from  66  to  75 
per  cent,  of  their  par  value,  in  payment  of  lands 
taken  in  settlement  by  the  bank's  creditors.2  The 
trustees  continued  their  operations  until  the  whole 
estate  and  powers  vested  in  them  were  transferred 
to  the  crown  by  an  act  of  1870,  approved  the  12th 

Sessional    Papers,  1869,  no.  6.     Correspondence,  Bank  of  Upper 
Canada. 
2  Ibid,  p.  6. 


Failure  of  the  Bank  of  Upper  Canada  173 

May  (33  Vic.,   cap.  140).     The   following  table  will 
indicate  the  progress  of  the  liquidation  down  to  1882: 


COO  0 

•      0     0 

:          '            i 

^~ 

c 

C^  CO 

»0 

•= 

-Js 

i^Sq 

•    o    o 

GO 
CO 

i 

COCO 

•  — 

c 

2 

22| 

€*&•              Oc"o"iC 

:  3  <°  :       S  i 

kC 

oijo 

0 

g 

1 

5 

I 

T~ 

**" 

o 

c 

«a 

1^0  ^ 

CO  Ol  CT.  -*  i— 

0  r^          X 

., 

r^ 

^g 

I—  1    Tf    CO 

<~  ^   r—  t  T—  <  I'*'  f"^ 

r-i   tO            X                  (T5 

gfg 

CO  CO  10 

iOCO^-f,C001cb!^             CO 

CO  -t  CO  O  00 

**        "*$;§ 

rH  OC  CO  r~  r^- 

r-irH           j^ 

CO 

1C  -f  Ol  O  CO 
iO  t>-  Ol  1C  r-i 

*-f 

3 

Q 

5 

r—  1  1—  i 

-r 

!  | 

c 

® 

05  CO  1C   ~f   r-- 

CO  O^  i~~*  ^O  t"— 

ts 

1    § 

^1* 
•*||§ 

01  0 

Si 

10 

i 

CO  COO 

oo  oo  ^ 

§ 

a 

to 

5?      T3 

3  1 

2  ^" 

8f5 

01  iS> 
01  j? 

CO 

^0  r^ 

00 

IIISS 

X 
— 
OO 

c    .§ 
33    "S 

cc        o 

Q 

1  ! 

!  1 

1 

!   -  H 

'i' 

i 

-j 

-!  1 

1 

OJ       S 

1 

01 

-•   i 

S5g 

01 

CO 

CO  00 

S§^ 

B 

CO  I> 

I  -r 

CO  CO 

s 

05 

i* 

•|- 

€^co 

01  0 

g 

LO  §  r^ 

CO  O 

Ills 

J^ 

i=s 
1,8  i 

CO 

s  s 

3 

'Q* 

§® 

1 

1 

0      • 

co  :      c:  oo 

00      j             r^CO 
|>.     [           ^<|  CO 

m 

i 

~ 

«** 

*^of 

8 

CD 

c^    ' 

§  !    11 

m 

i 

a» 

•o 

co 

CO 

r—  i 

s 

^ 

r— 

CO 

^ 

a 

1 

s 

CO  r-i 
S§ 

11 

1 

|: 

s 

CO  0' 

0  0 
O  CO 
CO  "*> 

kC 

p. 

c. 

o' 

-I2 

^^5  r^ 

CO  Ol 

CO 

co  ; 

CO 

o 

Ol  OS 
l>-  CO 

II 

I 

A 

01 

r^ 

i  ** 

rH 

71 

§c 

0 

rH 

si 

'S 

«  :  o   :  8  2 

•    '  a 
o 

I 

y 

'.      '. 

'S  ofie  »  *   > 

a 

1 

• 

— 

T 

a 

JSS'SIS 

.    -4J      5 

1 

<S    •  c  c 

t/r 

3   S    O 

.S  c  S*-0  *  » 

C    ~    Z 
S   O 

O    <•)     - 

;  ,       ^ 

_ 
- 

g. 

•a 

'gJljsg!   -gigj 

J-M^               .2  » 

0    £    03 

j                   i 

stock. 
Sessiona 
108a. 

gi  gfrllff  §pl! 

(  %  >    :  ..-S  ^ 

- 

oo  eV. 

Ill 

174  The  Canadian  Banking  System,  1817-1890 

It  appears  from  this  that  the  liabilities  of  the  bank 
to  the  Canadian  public  (deposits  and  note  circulation) 
stood  in  November,  1866,  at  $1,117,826,  and  were 
reduced  by  the  end  of  1868  to  $468,583  (including 
certificates  of  deposit  issued  by  trustees),  by  1870  to 
$99,161,  and  by  1882  to  $5,000  (estimated).  The 
government  continued  to  redeem  its  liabilities  at  75 
cents  on  the  dollar  after  the  property  was  vested  in 
the  Crown.  Supposing  the  redemptions  previous  to 
December,  1868,  to  have  been  at  the  average  rate  of 
70  per  cent.,  regarding  only  the  direct  capital  loss, 
and  making  no  allowance  for  the  extra  discounts  to 
which  needy  note  holders  or  depositors  were  obliged 
to  submit,  I  calculate  that  the  Canadian  creditors  of 
the  Bank  of  Upper  Canada  lost  at  least  $310,000  by 
the  failure.  The  stockholders  lost  the  whole  of  a 
capital  which  was  once  $3,170,000;  the  government, 
and  through  it  the  taxpayers,  lost  all  but  $150,000  of 
deposits  amounting  to  over  $1,150, 000. 1  For  proprie 
tors  and  creditors  combined  the  result  of  the  failure 
was  the  disappearance  of  a  principal  which  cannot 
be  reckoned  at  less  than  five  millions  of  dollars,  a 
sum  equal  to  17  per  cent,  of  the  entire  banking  capi 
tal  of  the  province.  Such  a  loss  to  the  Canada  of 
those  days,  and  to  Canada  West,  where  the  larger 
amounts  were  involved,  was  not  merely  severe;  it 
was  enormous. 

One  of  the  questions  suggested  by  the  facts  I  have 
recounted  is,  Why  was  not  the  double  liability  of 
the  shareholders  enforced  ?  But  the  true  answer 
will  not  be  found  in  the  documents.  The  trustees 

1  Sessional  Papers,  Canada,  1882,  No.  108  a. 


Failure  of  the  Bank  of  Upper  Canada  1 75 

reported  on  the  three  thousand  shareholders  in  De 
cember,  1868,  thus:1 

Executives,  guardians  and  minors $129,360 

Trustees 337,500 

Municipalities 12  810 

Females  and  persons  living  abroad 582,165 

Residents  in  Canada,  not  known 172,220 

"        "         believed  to  be  bad 139,900 

including  females,  believed  to  be  good  562,890 

$1,939,845 

It  is  true  that  loss  had  fallen  upon  many  of  those 
least  able  to  bear  it,  widows,  orphans,  women  and 
aged  investors  of  small  means,  who  had  put  their 
little  all  into  the  stock  of  what  was  once  the  govern 
ment  bank,  and  suddenly  found  themselves  stripped 
both  of  principal  and  income.  It  is  true  that  the 
government,  as  the  largest  creditor  of  the  bank,  had 
secured  the  "opinion  of  the  best  legal  authority" 
that  any  contribution  from  the  shareholders  under 
the  double  liability  clause  could  not  be  enforced  by 
law  until  the  entire  estate  had  been  realized.  For 
that  process,  it  was  thought,  in  1868,  that  five  more 
years  would  be  needed.  It  is  also  true  that  the 
government  carefully  abstained  from  an  effort 
to  secure  judicial  decision  upon  the  question.  And 
there  is  no  doubt  that  the  government  of  the  years 
in  which  the  Bank  of  Upper  Canada  was  still  sol 
vent,  and  the  knowledge  of  its  losses  had  not  reached 
the  public,  having  the  bank  at  their  mercy  in  con-se 
quence  of  the  heavy  indebtedness  to  the  Treasury, 
abused  their  position,  and  compelled  the  bank  to 
make  many  advances  for  political  reasons  which  re 
sulted  in  very  heavy  losses.2  It  is  not  denied,  of 

Sessional  Papers,  1869,  No.  6,  p.  5. 

*I  do  not  pretend  to  cite  the  documents  for  this  or  for  a  number  of 
other  statements  made  in  relation  to  the  Bank  of  Upper  Canada;  but 


176  The  Canadian  Banking  System,  1817-1890 

course,  that  there  must  have  been  grave  mismanage 
ment  to  bring  the  bank  into  a  condition  in  which  it 
had  to  submit  to  such  demands,  or  that  the  chief 
cause  of  the  failure  was  the  collapse  in  Ontario  in 
1858.  There  is  no  doubt  that  all  four  factors,  the 
contributory  responsibility  for  the  failure  which  the 
government  could  scarce  avoid,  certain  political 
motives,  never  yet  revealed,  of  the  party  in  power, 
the  distressed  condition  of  many  shareholders,  and 
the  opinion  of  the  government's  legal  advisers,  com- 
bined  to  prevent  the  effort  to  enforce  the  double 
liability. 

Instead  tremendous  efforts  were  put  forth  to  pre 
vent  a  full  inquiry,  attempts  were  made  to  silence 
the  press,  and  they  were  not  without  success.1  The 
liquidation  under  trustees  was  costly,  absorbing, 
in  all,  some  $90,000  a  year.  The  government, 
although  the  largest  creditor,  had  received  no  divi 
dend  on  its  claim;  the  assets  were  insufficient  to 
meet  the  liabilities  of  the  bank.  But  it  was  thought 
that  the  government,  having  no  taxes  to  pay,  and 
being  able  to  wait,  would  succeed  in  securing  more 
from  the  real  estate  than  could  be  had  by  private 
manipulation.  Accordingly  the  act  of  1870,  already 
mentioned,  was  passed.  In  1871  not  more  than 
$250,000  were  placed  at  the  disposal  of  the  Governor- 
in-Council  to  pay  off  claims  upon  the  bank,  provided 
its  assets  contained  ample  security  for  reimburse- 

I  have  them  from  contemporary  authorities  as  credible  as  exist  in 
the  Dominion  of  Canada,  and  members,  some  of  one,  some  of 
another  party.  Many  of  the  bank's  books  were  destroyed  after  the 
failure,  and  legal  evidence  of  the  misdoings  referred  to  is  not  pro 
curable.  Very  few  of  those  who  could  speak  from  personal  knowl 
edge  are  now  living. 

1  Monetary  Times,  vol.  iii,  p.  126. 


The  Provincial  Note  Act  of  1866  177 

ment.  (34  Vic.,  cap.  8.)  Eleven  years  later  $5,000 
more  were  similarly  voted.  The  course  of  the  subse 
quent  liquidation  is  familiar.  It  remains  now 
merely  to  remark  some  of  the  valuable  effects  of  the 
failure.  Blind  popular  belief  in  the  safety  of  banks 
as  banks,  was  corrected,  and  a  popular  criticism  was 
created  and  thereafter  applied  to  the  management 
and  accounts  of  the  banks  which  served  the  province. 
To  managers  and  directors  it  gave  a  wholesome 
warning,  not  only  to  look  to  the  inner  organization 
of  their  banks,  but  also  to  guard  against  loans  what 
soever  on  real  estate  security.  Finally  it  opened  the 
way  for  two  or  three  clean-handed  young  banks, 
who  were  destined,  partly  in  filling  the  Upper 
Canada's  place,  to  take  rank  among  the  leading 
banks  of  the  Dominion. 


§31. — THE    PROVINCIAL    NOTE    ACT    OF    1866 

The  government  in  which  the  Honorable  (after 
wards  Sir)  A.  T.  Gait  acted  as  Minister  of  Finance, 
was  obliged  in  1866,  to  raise  some  $5,000,000  to  dis 
charge  the  floating  debt.  The  credit  of  the  province 
had  suffered  in  the  English  market  on  account  of  the 
renewal,  from  time  to  time,  of  the  balances  in  arrears. 
The  Minister  averred  that  the  Canadian  banks  were 
unwilling  to  extend  to  the  government  a  loan  amount 
ing  to  15  per  cent,  of  their  capital.1  The  Bank  of 
Montreal  was  already  a  creditor  for  $2,250,000,  and 
was  pressing  for  payment.  The  government  would 
not  trust  to  the  chance  of  meeting  the  engagements 
of  the  country  by  large  loans  at  high  rates  of  inter 
est.  "The  government,"  said  Mr.  Gait,  "should  re- 
Toronto  Globe,  4th  August,  1866,  Ottawa  Times,  4th  August,  1866. 
12 


178  The  Canadian  Banking  System,  1817-1890 

sume  a  portion  of  the  rights  which  they  had  deputed 
to  others,  and  meet  the  liabilities  of  the  country  with 
the  currency  which  belonged  to  it."  In  short,  he 
acknowledged  the  primary  cause  of  all  paper  curren 
cies  emitted  by  government — government  needs. 
But  he  professed  to  offer  to  Parliament  the  choice 
between  issuing  two-year  debentures  at  7  per  cent., 
receivable  for  public  dues,  and  establishing  a  govern 
ment  currency.  The  offer  of  the  alternative  was  as 
insincere  as  his  solicitude,  in  1860,  for  the  security 
of  the  bank  note  circulation.  It  was  asserted  in 
Parliament,  and  not  denied,  that  note  plates  had 
been  engraved  two  years  before  the  bill  was  intro 
duced,  and  that  clerks  were  actually  engaged  in  sign 
ing  the  notes  while  the  bill  was  under  discussion. 
The  proposal  to  issue  debentures  was  a  sham  and  a 
delusion.1  Furthermore  the  Minister's  justification 
of  his  real  plan  was  unsound.  For  those  who  wish 
it  the  discussion  of  this  contention  will  be  found  in 
the  note  at  the  end  of  the  chapter. 

In  Canada  a  proposal  to  establish  a  provincial  mon 
opoly  of  the  note  issue  would  have  conflicted  with 
the  convictions  of  a  people  inveterately  suspicious  of 
all  monopolies  and  taught  by  long  years  of  colonial 
struggle  to  be  particularly  jealous  of  the  executive. 
The  Minister,  accordingly,  did  not  dare  to  propose 
the  complete  and  instant  abolition  of  the  bank  note 
currency  used  by  the  people  for  forty  years.  But  he 
had  his  party  behind  him,  he  had  pressing  demands 
to  meet,  and  he  lacked,  apparently,  the  courage  to 
borrow,  at  the  market  rate  of  interest,  the  necessary 
funds.  Shorn  of  the  fallacy  and  verbiage  with  which 
he  introduced  it,  his  plan  was  simply  to  extend  the 

Ottawa  Time*,  4th  December,  1867. 


The  Provincial  Note  Act  of  1866  179 

activities  of  the  government  in  the  economic  field,  by 
assuming  the  right  to  issue,  under  the  authority  of 
the  Governor  in-Council,  not  more  than  $8,000,000  of 
provincial  notes,  payable  on  demand  in  specie  at 
Toronto  or  Montreal,  as  they  might  be  dated,  and 
legal  tender  except  at  those  offices.  The  act  received 
the  royal  assent  the  15th  August,  1866  (29  Vic.,  cap. 
10.)  The  compulsory  gradual  retirement  of  the  bank 
note  circulation  provided  for  in  the  original  bill  was 
struck  out  in  the  House  of  Commons.  Partly  in  its 
stead  were  adopted  provisions  for  inducing  the  banks 
to  surrender  their  circulation  and  take  up  the  issue 
and  redemption  of  provincial  notes.  The  considera 
tion  offered  was  the  payment  of  five  per  cent,  per 
annum  on  the  amount  of  notes  outstanding  the  30th 
April,  1866,  until  the  expiry  of  the  charter  of  any 
bank  which  might  accept  the  conditions  of  the  act 
and  withdraw  its  own  circulation  before  the  1st 
January,  1868,  compensation  to  be  paid  from  the 
date  of  such  withdrawal.  For  the  service  of  issue 
and  redemption,  one-quarter  of  one  per  cent,  was  to 
be  paid  at  the  end  of  every  three  months  upon  the 
average  amount  outstanding  during  that  period  of 
provincial  paper  issued  by  the  bank.  As  a  further 
inducement,  banks  giving  up  their  issue  rights  were 
accorded  exemption  from  the  obligation  to  invest  ten 
per  cent,  of  their  paid-up  capital  in  provincial  deben 
tures,  and  were  allowed  to  exchange  them  at  par  for 
provincial  notes.  The  last  was  the  offer  of  a  decided 
bargain,  for  debentures  were  then  worth  not  more 
than  83.  The  Receiver  General  was  obliged  to  hold 
specie  for  the  redemption  of  the  notes  to  20  per  cent, 
of  the  circulation  under  $5,000,000,  and  25  per  cent, 
for  the  circulation  in  excess  of  $5,000,000.  He  was 


180  The  Canadian  Banking  System,  1817-1890 

to  issue  and  hold  provincial  debentures  for  the  full 
amount  by  which  the  reserve  of  specie  should  fail  to 
cover  the  circulation  outstanding.  Proceeds  from 
the  issue  operations  were  to  be  turned  into  the  Con 
solidated  Revenue  Fund,  and  expenses  lawfully  in 
curred  under  the  act  were  to  be  charged  upon  it. 
The  Free  Banking  Act  was  repealed  save  as  to  the 
privilege  of  issuing  one  and  two  dollar  notes  enjoyed 
under  it  by  the  Bank  of  British  North  America,  and 
all  the  chartered  banks  were  relieved  from  the  pen 
alties  retained  in  the  act  of  1858  for  taking  interest 
above  7  per  cent.1 


§32. EFFECTS  OF  THE  PROVINCIAL  NOTE  ACT 

The  condition  of  the  money  market  and  of  trade 
in  the  autumn  of  1866  was  such  that  all  but  one  of 
the  banks  were  unwilling  to  reduce  their  resources 
by  that  retirement  of  their  notes  from  circulation 
which  acceptance  of  the  government's  offer  would 
have  rendered  necessary.2  That  single  bank  was 
the  Bank  of  Montreal.  As  fast  as  it  withdrew  its 
own  notes  it  was  able  to  replace  them  by  notes  of  the 
province.3  These  were  set  off  against  the  two  and  a 
quarter  millions  owed  by  the  government,  the  pre- 

lfrhese  penalties  were  those  imposed  by  the  Acts  51  Geo.  Ill,  cap. 
9,  U.  C.,  and  17  Geo.  Ill,  cap.  3,  L.  C.,  viz.:  for  taking,  exacting 
accepting  or  receiving  interest  above  the  authorized  rate,  forfei 
ture  of  thrice  the  value  of  the  money,  goods,  wares  or  merchandise 
sent  or  bargained  for,  one-half  to  the  Crown  (later  to  the  support  of 
the  civil  government  of  the  province),  and  one- half  to  the  person 
suing  therefor.  Since  1866  the  only  statutory  restriction  upon  the 
rate  of  interest  chargeable  by  the  banks  has  been  the  impossibility 
of  collecting  at  law  the  excess  above  legal  rate. 

2 Parliamentary  Debates,  Can.,  vol.  i,  p.  802. 

3 Journal  of  the  Senate,  Canada,  1867-68,  Appendix  1,  p.  7. 


Effects  of  the  Provincial  Note  Act  181 

vious  locking  up  of  which  may  be  presumed  seriously 
to  have  crippled  the  operations  of  the  bank.  Or  they 
may  have  been  obtained  in  exchange  for  the  $600,000 
of  debentures,  worth  about  83,  formerly  held  by  the 
bank  according  to  charter,  but  now  redeemed  by  the 
government  at  par.  The  position  of  the  Bank  of 
Montreal  was  unquestionably  improved  by  the 
change.  Nearly  three  millions  of  assets,  which  for 
some  time  had  been  unavailable  for  immediate  pur 
poses,  were  put  into  liquid  condition. 

The  effect  on  the  total  circulation  in  the  hands  of 
the  public  during  the  first  year  of  the  Bank  of  Mon 
treal's  operations  under  the  act  was  inconsiderable. 
It  received  compensation  upon  $3,130,818,  the  amount . 
of  its  outstanding  issues  on  the  30th  April,  1866; 
from  November,  1866,  to  the  31st  December,  1867, 
the  average  of  provincial  notes  in  circulation  was 
$3,147,180.1  The  profit  to  the  government  during 
this  period  and  the  following  year  was  also  incon 
siderable;  according  to  some  calculations  a  direct 
loss  was  incurred  under  the  act,  but  this  point  is  not 
now  pertinent. 

What  was  the  effect  of  the  act  upon  the  banks  and 
the  country?  A  general  answer  must  be  postponed 
until  the  results  of  this  legislation  have  been  studied 
in  detail. 

First,  then,  while  assets  amounting  to  some 
$2,800,000  had  been  locked  up  in  government  debt, 
the  Bank  of  Montreal,  it  was  said,  had  been  sorely 
pressed  by  the  Quebec  and  British  Banks  and  La 
Banque  du  Peuple.2  After  the  passing  of  the  Pro 
vincial  Note  Act  it  was  put  in  a  position  to  use  its 

1  Monetary  Times  and  Insurance  Chronicle,  Toronto,  vol.  i,  p.  369. 

2  Ibid,  p.  101. 


182  The  Canadian  Banking  System,  1817-1890 

strength.  It  had  been  the  practice  to  settle  balances 
arising  from  the  exchanges  between  the  banks  and 
branches  in  different  parts  of  the  country  by  drafts 
on  Montreal  or  Toronto.  Owing  to  its  possession  of 
the  government  accounts  these  balances  were  usually 
in  favor  of  the  Bank  of  Montreal.  As  the  arrange 
ments  for  balances  were  merely  conventional,  it  had 
the  power  in  this  case  to  exact  gold,  unless  its  debtors 
happened  to  be  stocked  with  legal  tenders.  But  that 
was  unlikely,  as  the  demands  on  bank  reserves  were 
largely  for  export,  and  for  this  they  needed  gold. 
When  the  balances  were  against  them  the  govern 
ment's  bankers  could  pay  in  gold  or  in  legal  tenders. 
They  had  a  direct  interest  in  getting  as  many  of  the 
latter  into  circulation  as  they  could.  By  threatening 
to  exact  settlements  at  all  points  in  money,  instead 
of  in  drafts  upon  the  financial  centers,  the  Bank  of 
Montreal  was  able  to  coerce  sundry'of  its  competi 
tors  into  holding  regularly  at  least  $1,000,000  of  pro 
vincial  notes  in  sums  ranging  from  $50,000  to  $200,- 
000,  under  arrangements  which  practically  set  these 
sums  apart  from  the  funds  available  for  banking 
purposes.1  For  those  who  yielded  to  the  threat  the 

1  Journal  of  the  Senate,  Canada,  1867-68,  Appendix  1,  pp.  3,  7,  14, 
19,  24.  The  Bank  of  Toronto  held  $100,000  of  notes  which  could 
not  be  presented  for  redemption  without  fifteen  days'  notice  "to 
promote  the  financial  interests  of  the  Government  and  to  secure 
favorable  arrangements  with  the  Bank  of  Montreal  as  to  the  settle 
ment  of  balances,"  p.  7. 

The  $200,000  held  by  the  Bank  of  British  North  America  under  a 
formal  arrangement  with  the  fiscal  agents  of  the  government  was 
available  at  all  times  for  ordinary  business,  but  *'*<  must  bemadegood 
in  twenty-four  hours  and  paid  for  by  exchange,  gold  drafts  on  New 
York,  or  specie."  It  was  terminable  on  seven  days'  notice  and  "was 
entered  into  to  facilitate  settlement  of  balances  throughout  Canada 
with  the  financial  agents,  and  because  it  was  agreeable  to  the  Gov 
ernment,"  p.  28.  The  italics  are  my  own. 


Effects  of  the  Provincial  Note  Act  183 

diminution  of  banking  resources  was  considerable  if 
viewed  in  relation  to  specie  reserves,  inconsiderable 
if  in  relation  to  their  funds  for  discounting,  but  still 
a  diminution.  Banks  with  many  agencies  who  re 
fused  to  enter  into  such  arrangements  were  obliged 
either  to  hold  larger  reserves  and  distribute  them 
more  widely,  while  pari  passu  their  power  to  dis 
count  was  diminished,  or  to  restrict  their  business  to 
the  volume  which,  under  the  new  conditions,  could 
be  safely  based  upon  the  old  reserve.1 

Second.  "The  Bank  of  Montreal  having  with 
drawn  its  own  notes  from  circulation  and  substituted 
for  them  the  notes  of  the  province,  it  was  no  longer 
interested,  in  common  with  the  other  kindred  insti 
tutions,  in  maintaining  unimpaired  the  credit  of  all; 
the  effect  of  that  act  (the  Provincial  Note  Act)  was 
to  place  the  interests  of  the  Bank  of  Montreal,  the 
most  powerful  monied  institution  in  Canada  and 
the  fiscal  agent  of  the  government,  in  antagonism 
to  those  of  the  other  banks."2  This  conclusion  of  a 
select  committee  of  the  senate  is  not  refuted  by  the 
returns  made  by  the  several  banks  to  the  govern 
ment.  Between  the  30th  September,  1866,  and  the 
same  day  of  1867,  the  proportion  of  specie  or  its 
equivalent  held  by  the  Bank  of  Montreal  against 
immediate  liabilities  had  fallen;  the  amount  of  notes 
issued  by  it  and  outstanding  in  the  hands  of  the 

xMr.  James  Stevenson,  cashier  of  the  Quebec  Bank,  said  that  ordi 
narily  one-fifth  of  the  circulation  and  deposits,  and  one-seventh  of 
the  amount  of  time  deposits,  were  sufficient  money  reserve,  but  that 
a  demand  for  settlement  in  gold  or  legal  tenders  at  all  the  agencies 
of  an  extended  bank  would  compel  the  bank  to  keep  at  least  one- 
fourth  of  the  circulation  and  deposits  as  a  reserve.  Ibid,  p.  24. 

2lbid,  pp.  l,  2.  The  document  cited  is  the  second  report  of  the 
Select  Committee  upon  the  Causes  of  the  Recent  Financial  Crisis  in 
the  Province  of  Ontario. 


184          The  Canadian  Banking  System,  1817-1890 


public  had  decreased,  and  so  had  the  bank's  public 
deposits.1  The  aggregates  of  the  other  banks  showed 
an  increase  in  each  of  these  items.  Assuming  that 
there  had  been  a  general  stagnation  in  business  prior 
to  October,  1867,  the  Bank  of  Montreal,  compared  to 
the  other  banks,  was  unprepared  to  meet  heavy 

xThe  following  figures  are  taken  from  the  government  return 
dated  llth  March,  1868,  quoted  in  the  periodical  named  below,  and 
the  usual  "Statements  of  banks  acting  under  charter"  in  the  Canada 
Gazette: 

Extracts  from  the  statements  of  chartered  banks  in  the  Province 
of  Canada,  for  30th  September,  1866,  and  30th  September,  1867,  ex 
clusive  of  the  Bank  of  Upper  Canada. 


Immediate  Liabilities. 

Bank  of 

Montreal, 

1866 

Bank  of 

Montreal, 

1867 

Bank  of 
Montreal, 
as  Gov't 
Bank, 
1867-71 

Other 
Banks, 

1866 

Other 
Banks, 

1867 

Bank  notes  in  circu 
lation      

$ 

3,187,995 

$ 

657,862 

$ 

$ 

6,716,324 

$ 

8,477,058 

Provincial  notes  in 
circulation  

2  000  000 

Provincial  notes  in 
Bank  of  Montreal 
Provincial  notes  in 
other  banks  

385,693 
1,000,000 

Deposits  by  public.. 
"        "  gov't  .. 

8,078,762 
1,015,052 

7,505,201 

14,648,883 

19,651,188 

«        «        « 

prov.notesonhand 
Deposits  by  gov't  on 
issue  account  

2,120,987 
351,995 

Due  by  Commercial 
Bank  on  loan.  .  .  . 

300,000 
84,279 

Due  foreign  banks.. 

Total    

12,281,809 

10,636,045 

3,385,69321,365,207 

28,512,525 

Quick  Assets. 

$ 
1,845,325 

$ 

545,308 

$ 

$ 
3,479,260 

$ 
4,334,454 

'  Y,bbo,666 

1,559,212 

"  heldforredemp- 
tion  of  prov.  notes 
Provincial  notes..  .  . 

677,138 

Notes  and  cheques  of 
other  banks        .  . 

324,325 

379,438 
300,000 
976,260 

1,095,425 

Due  by  Com'l  Bank 
t(  foreign  banks 

Percentage  of  specie 
or  its  equivalent.. 
Ch'ge  in  specie  66-'67 
"   incirculation 

885,736 

1,541,383  

3,055,386 

2,201,006 

677,138   6,116,068     6,893,666 

25* 

19* 

—$622,879 
—  530,133 
—  573,561 

29^ 

24  % 
+  $855,194 
+1,760,734 
+5,002,305 

"   in  pub.  deposits 

Effects  of  the  Provincial  Note  Act  185 

demands  by  the  public.  But  if  we  adopt  the  com 
mittee's  conclusion  and  assume  that  there  was  gen 
eral  prosperity  and  soundness  in  trade,  involving 
increased  circulation  and  heavy  deposits,  the  bank's 
position  was  such  that,  provided  confidence  in  itself 
were  undisturbed,  a  general  discredit  of  the  other 
banks  would  be,  a  priori,  not  only  desirable  but  pro 
fitable.1  Such  a  discredit  would  tend  to  increase  the 
circulation  of  provincial  notes,  to  attract  depositors 
to  the  security  of  the  government  bank,  and  to  bring 
the  "valuable  accounts"  of  merchants  to  the  great 
institution  that  could  afford  them  discounts. 

Third.  In  1858  and  1859  the  Commercial  Bank  fur 
nished  large  advances  for  the  current  expenses  and 
completion  of  an  American  railway,  the  Detroit  and 
Milwaukee  R.  R.,  on  the  faith  of  a  grant  of  £250,000 
stg.,  secured  from  the  London  Board  of  the  Great 
Western  Railway.  The  bank  supposed  that  the  loans 
were  made  to  the  Great  Western  Railway,  but  under 
the  Commercial's  system  of  cash  credits,  evidences  of 
that  corporation's  liability  were  not  secured  at  the 
time  of  each  advance.  "The  advances  were  made 
by  overdraft  on  current  account,  and  the  headings  of 
the  ledger  as  made  by  a  clerk,  as  he  carried  the 
account  from  folio  to  folio,  were  so  indefinite  as  to 
leave  room  for  endless  dispute."2  The  agreement 
was  that  traffic  receipts  of  the  D.  &  M.  should  be  de 
posited  with  the  bank,  and  exchange  on  the  London 
Board  of  the  G.  W.  R.  Co.  given  monthly  to  cover 
deficiencies.  Only  about  £82,620  stg.  of  this  exchange 
were  drawn.  By  the  end  of  1859  there  was  a  large 
balance  in  favor  of  the  bank.  The  Great  Western's 

lCf.  the  arguments  in  the  Monetary  Times,  vol.  i,  p.  419. 
2"  Bullion  on  Banking,  with  notes  and  observations  by  a  Canadian 
bank  manager,"  Toronto,  1876,  p.  24,  note. 


186  The  Canadian  Banking  tiystem,  1817-1890 

London  directors  contended  that  the  credit  was  given 
to  the  D.  &  M.,  or  to  their  own  Canadian  colleagues, 
who  were  managing  the  American  enterprise,  as 
individuals.  Suit  for  a  million  odd  dollars  was 
brought  against  the  English  company  in  1862, 1  The 
Court  of  Queen's  Bench  decided  in  favor  of  the  bank. 
On  appeal  it  was  held,  in  1864,  that  so  much  of  the 
£250,000  loan  as  had  not  been  drawn  for  could  be 
recovered  by  the  bank,  that  the  lower  court  should 
have  so  declared  the  liability  of  the  Great  Western 
Company,  and  that,  as  it  had  not  done  so,  there 
should  be  a  new  trial,  unless  the  parties  settled  on 
this  footing  or  ascertained  the  amount  by  a  referee.2 
During  the  litigation  the  capital,  of  course,  was 
still  locked  up,  and  neither  principal  nor  interest  was 
settled  for  until  the  autumn  of  1866.  The  bank  then 
obtained  $1,770,000  of  Detroit  and  Milwaukee  30- 
year  bonds,  bearing  interest  at  7  per  cent.,  $100,000 
of  which  were  payable  annually.3  But  instead  of 
selling  them  promptly  the  bank  waited  to  realize 
upon  the  bonds,  and  thus  failed  to  set  free  its  locked 
up  funds.  The  community  suspected  that  the  capi 
tal  had  been  impaired.  Distrust,  inspired  by  the 
failure  of  the  preceding  year,  was  still  strong.  It 
became  known  that  the  bank  had  been  obliged  to 
give  security  to  several  of  its  largest  depositors.  A 
run  was  then  started  upon  the  deposits.  A  loan  of 
$300,000  upon  collateral,  secured  by  the  help  of  the 
government's  request  from  the  Bank  of  Montreal, 
averted  immediate  danger.  This  was  the  16th  or 
17th  September,  1867.  A  month  later  another  run 
upon  deposits  was  begun.  The  representatives  of  all 

*23  U.  C.  Queen's  Bench  Reports,  p.  285. 

22  Error  and  Appeal,  p.  285. 

3 Toronto  Globe,  23d  October,  1866. 


Effects  of  the  Provincial  Note  Act  187 

the  banks  in  Canada  West  met  at  Montreal  the  21st 
October.  The  Commercial  Bank  asked  for  an  ad 
vance  of  $750,000,  one-half  at  four  and  one-half  at 
six  months,  and  offered  the  D.  &  M.  bonds  as  secu 
rity.  A  discussion  ensued  as  to  the  "amount  to  be 
contributed  by  each  bank,  the  representatives  of  the 
Bank  of  Montreal  and  the  Bank  of  British  North 
America  contending  that  the  shares  should  be  in  pro 
portion  to  circulation  and  deposits;  the  others  for 
contributions  in  proportion  to  capital.  The  Bank  of 
Montreal  offered  to  advance  two-thirds  of  the  money 
necessary  to  sustain  the  Commercial,  provided  the 
other  banks  would  guarantee  it.  The  British  Bank 
offered  the  other  third  on  the  same  terms.  This  plan 
was  rejected  by  the  other  banks.  The  two  Montreal 
banks  then  withdrew  from  the  meeting,  the  Bank  of 
Montreal  agreeing  in  the  meanwhile  not  to  discredit 
the  Commercial,  but  refusing,  practically,  to  grant 
assistance  on  the  same  basis  as  the  other  banks.  An 
unsatisfactory  understanding  reached  at  noon  was 
objected  to  by  some  of  the  head  offices  at  five  o'clock. 
Then  the  Bank  of  Montreal  declined  to  accept  the 
responsibility  of  taking  in  hand  the  affairs  of  the 
Commercial  and  protecting  the  creditors.1  The  gov 
ernment  was  anxious  to  avert  the  failure,  but  as  they 
were  again  owing  the  Bank  of  Montreal  two  millions 
and  a  half,  they  could  not  urge  it  to  act.  It  is  not 
apparent  from  the  returns  or  circumstances  that  the 
latter  had  any  interest  in  maintaining  the  credit  of 
the  Commercial  or  of  other  banks.  The  Privy 
Council  did  not  feel  justified  further  to  interfere,  and 
on  the  morning  of  the  22d  October  the  Commercial 
Bank  of  Canada  stopped  payment.2 

lrroronto  Globe,  28th  October,  1807.  Ottawa  Times,  13th  Decem 
ber,  1867,  Mr.  Gait's  explanations  respecting  the  Commercial  Bank 
failure. 

2  Ibid. 


188  The  Canadian  Banking  System,  1817-1890 

Over  $2,000,000  of  notes  and  deposits  were  paid  in 
the  thirty-five  days  after  the  19th  October.  By  the 
31st  December  its  total  liabilities,  averaging  $4,657,- 
000  in  September,  were  reduced  to  $1,871,173.  The 
amalgamation  of  the  Commercial  with  any  other  bank 
or  banks  was  authorized  by  the  Dominion  Parliament 
the  21st  December,  1867.  (31  Vic.,  cap.  17.)  The 
contract  with  the  Merchants'  Bank  of  Canada  by 
which  the  shareholders  got  one  share  in  the  Mer 
chants'  for  three  in  the  Commercial,  was  confirmed 
the  22d  May,  1868.  (31  Vic.,  cap.  84.)  All  its  lia 
bilities  were  redeemed  in  full.  The  rapidity  of  this 
redemption,  as  well  as  the  course  of  the  bank  pre 
vious  to  the  suspension,  can  best  be  read  in  the  table 
appended.1 

Its  shareholders  lost  two-thirds  of  their  invest 
ments,  and  another  of  the  Upper  Canadian  banks 
succumbed  to  the  fate  which  overtook  them  all.  But 
the  failure  of  the  Commercial  Bank  was  honorable. 
It  was  the  result,  as  we  have  seen,  partly  of  one  large 
and  bad  account,  partly  of  the  suspicion  caused  by 
the  bank  disaster  of  the  year  before.  If,  however, 
we  accept  the  explanation  given  by  its  president,  it 
must  be  said  that  the  "real  and  ultimate  cause  was 
the  measure  which  had  been  inflicted  on  all  the  bank 
ing  institutions  of  the  country."2 

'See  Table  next  page. 

2 Ottawa  Times,  4th  December,  1867,  speech  of  Sir  Richard  J.  Cart- 
wright,  upon  the  Commercial  Bank  bill.  I  have  hesitated  to  use 
this  quotation  because,  though  none  other  was  published,  the 
press  reports  of  the  debates  in  these  years  are  somewhat  unreliable. 
The  distinguished  speaker  gave  evidence  to  the  Committee  of  the 
House  of  Cmmons  in  1869,  in  which  he  remarked:  "  No  apprecia 
ble  disturbance  was  caused  by  the  effects  of  the  act,  the  failures  of 
the  Bank  of  Upper  Canada  and  of  the  Commercial  Bank  being 
clearly  traceable  to  causes  wholly  unconnected  with  and  unaffected 
by  that  measure."  Vide  Journal,  1869,  App.  I,  p.  41. 


Effects  of  the  Provincial  Note  Act 


189 


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190          The  Canadian  Banking  System,  1817-1890 

Fourth.  As  the  event  was  not  altogether  a  sur 
prise,  the  excitement  occasioned  by  this  failure  soon 
subsided.  But  shortly  after  the  Commercial  sus 
pended,  the  Bank  of  Montreal  sent  a  confidential 
telegraph  caution  to  its  branch  managers  against 
some  of  the  western  banks  who,  as  individual  con 
cerns,  were  not  in  the  strongest  possible  condition. 
On  the  24th  October  a  run  was  started  on  several  of 
the  Ontario  banks.  It  increased  the  next  day,  the 
Royal  Canadian  being  the  most  affected  and  the  Gore 
next.  Towards  the  afternoon  of  the  26th  the  run 
nearly  ceased.  Then  came  the  alarming  report  that 
the  government's  bankers  were  refusing  the  notes  of 
the  Upper  Canadian  banks  except  for  collection.  The 
panic  returned  with  increased  violence.  Money  rose 
in  Montreal  from  9  per  cent,  to  12  per  cent.  The 
Royal  Canadian  managed  to  meet  all  demands  upon 
it,  paying  out  over  $400,000,  but  the  panic  abated 
only  after  the  government  agents  in  all  parts  of  the 
country  had  been  instructed  by  telegraph  to  receive 
the  notes  of  all  chartered  banks  except  the  two  that 
had  failed  (Upper  Canada  and  Commercial.) 

The  rumor  that  revived  the  panic  was  not,  to  be 
sure,  exactly  correct.  The  explanation  of  the  action 
by  the  Bank  of  Montreal,  offered  through  its  general 
manager,  Mr.  E.  H.  King,  was  that  none  of  their 
agents  had  refused  the  notes  of  specie  paying  banks 
of  Upper  Canada,  "where  they  had  agencies,1  ex 
cept  the  manager  of  our  Kingston  branch,  who  acted 
under  misapprehension  and  was  immediately  cor 
rected  by  telegraph.2  Two  or  three  agents  did  de- 

1The  italics  are  mine. 

2 The  news  of  the  action  of  the  Bank  of  Montreal  reached  the 
government  at  2.30  p.  m.,  26th  October;  that  of  the  correction  of 
the  Kingston  manager,  given  by  the  bank's  head  office,  at  3.45  p.  m. 
the  same  day.  Ottawa  Times,  13th  December,  1867.  loc  cit. 


Effects  of  the  Provincial  Note  Act  191 

cline  to  receive,  except  on  collection,  notes  of  the 
Royal  Canadian  Bank  at  places  where  they  had  no 
office."1  The  notes  at  Kingston  had  been  thrown 
out  of  the  deposit  of  a  railway  company,  whose 
agent  immediately  warned  all  the  officers  on  its  line 
not  to  take  the  paper  of  the  bank.2  The  damage  was 
done  long  before  the  correction  from  the  Bank  of 
Montreal  could  reach  Kingston. 

Those  who  gave  evidence  to  the  Senate  Committee 
of  1867-68  were  nearly  unanimous  in  testifying  that 
trade  from  the  1st  of  September  to  the  middle  of 
October  was  in  a  very  satisfactory  state;  the  yield  of 
staple  crops,  if  a  little  less  than  the  year  before,  was 
still  good,  and  the  quality  excellent,  prices  were  high, 
money  plentiful,  and  importations  not  excessive. 
The  timber  trade  was  somewhat  quiet,  but  not  enough 
so  to  affect  the  general  prosperity.  After  the  bank 
failure  and  the  subsequent  panic,  uncertainty  as  to 
the  attitude  and  intentions  of  the  government's  fiscal 
agent,  compelled  the  other  banks,  in  great  measure, 
to  withhold  the  advances  obtained  in  the  autumn  by 
produce  dealers  and  others.  Yet  at  this  time  of  the 
year  an  expansion,  both  of  discounts  and  circulation, 
was  not  merely  normal,  it  was  economically  neces 
sary.  Trade,  therefore,  suffered;  produce  operations 
were  suddenly  interrupted;  money  was  scarce  and 
held  at  high  rates;  the  value  of  the  staple  products 
of  the  province  was  depreciated.  The  business  activ 
ity  of  September  was  changed  in  November  to  busi 
ness  stagnation.  If  the  failure  of  the  Commercial 

Journal  of  the  Senate,  1867-68,  App.  I,  p.  34.  As  a  matter  of  fact 
the  notes  of  the  Royal  Canadian  Bank  were  refused  except  for 
collection,  by  agents  of  Mr.  King's  bank  at  Belleville,  Brockviile, 
London,  St.  Mary's,  Brantford  and  Stratford,  as  well  as  at  Kingston. 
Toronto  Globe,  28th  and  30th  October,  1867. 

2 Ibid,  p.  15,  Evidence  of  Mr.  Woodside. 


192  The  Canadian  Banking  System,  1817-1890 


Bank  is  counted  the  third  of  these  results  to  which 
the  Provincial  Note  Act  contributed,  the  situation  in 
which  the  panic  was  revived  and  commercial  depres 
sion  induced,  must  be  taken  as  the  fourth. 

Fifth.  The  panic,  I  have  said,  was  quieted  by  the 
action  of  the  government.  The  larger  number  of 
runs  resulted  in  drains  of  not  more  than  three  per 
cent,  of  the  total  liabilities  of  the  several  banks 
affected.  In  the  heaviest  run,  not  more  than  ten  per 
cent,  of  such  total  was  called  for.  It  is  not  to  be 
supposed,  however,  that  distrust  vanished  immedi 
ately.  In  this  connection  a  comparison  of  the  bank 
statements  for  the  30th  September  and  30th  Novem 
ber  will  be  instructive.  The  table  herewith  indicates 
the  changes  in  each  direction  to  be  noticed  in  the 
November  statement  from  that  of  two  months 
previous. 

DIFFERENTIAL  COMPARISON  of  the  Statement  of  the  Banks  acting 
under  charter  in  Ontario  and  Quebec,  for  the  months  of  Sep 
tember  and  November  respectively,  1867: 


Liabilities 
Gov't  deposits  on  Gen.  Acct... 
"         on     Provincial 

Bank  of  A 
Increase 

lontreal 
Decrease 

Other  I 
Increase 

lanks 
Decrease 

$679,997 
502,540 







Notes  in  circulation 

$113,365 

$317,594 

1842,818 

300,000 

Deposits  by  the  public 

1,201,424 

Due  by  Commercial  Bank  on 
special  loan    •       .  • 

Balances  due  to  other  banks 

$420,590 
558,860 

Assets 
Specie,  and  provincial  notes... 
Government  securities   

1,447,869 

766*,  239 
300,000 

56,672 

Commercial  Bank  loan  repaid. 
Due  by  other  banks 

"464,228 
1.304.134 

Notes  and  bills  discounted.  . 

2.103.827 

1Cf.  The  Monetary  Times  and  Insurance   Chronicle,  Toronto,  1867, 
vol.  i,  p.  457. 


Effects  of  the  Provincial  Note  Act 


193 


The  increase  and  decrease  in  the  immediate  liabil 
ities  and  quick  assets  of  the  Bank  of  Montreal  and 
the  other  banks  of  Ontario  and  Quebec  (Upper  and 
Lower  Canada),  were  as  follows: 

Aggregate  Changes  from  the  September  average  in  the 
November  average 


Other  specie- 
paying  bks1 
Bank  Montreal 

Circulation 

Deposits 

Discounts 

Increase 

$ 
533,753 
389,1  84  2 

Decrease 

$ 
851,347 

Increase 

~~$ 
410,502 
1,881,400' 

Decrease 

$ 

2,253,289 

... 

Increase 

Decrease 

$ 
2,853,333 

$ 
749,506 
1,304,134 

We  have  seen  that  in  the  months  from  September 
to  December,  there  was,  between  the  Bank  of  Mon 
treal  and  the  other  banks,  a  difference  of  responsi 
bilities,  interests  and  position.  The  government  was 
depositing  large  sums  in  the  Bank  of  Montreal,  there 
to  let  them  rest  for  some  time.3  The  consequence  of 

1  Exclusive  of  the  Commercial  Bank. 

2As  the  provincial  note  circulation  was  profitable  to  the  Bank  of 
Montreal,  it  figures  under  the  item  of  circulation  as  the  bank's  own, 
and  is,  by  consequence,  deducted  from  the  deposits  made  by  gov 
ernment. 


3  Statement  of  average  daily 
balances  for  month  at  credit 
of  the  Receiver  General  in  the 
Bank  of  Montreal. 

1867— June $  875,372 

July 363,277 

August 639,137 

September....  1,653,482 

October 1,977,619 

November....  2,296,986 
December 1,728,622 

1868— January 1,010,247 

February 1,331,311 

March 1,816,591 

April 1,632,148 

May 1,932,985 

June 1,510,214 


Average  weekly  balances  of 
the  Receiver  General's  Issue 

Account   with  the    Bank    of 
Montreal. 

CREDIT.  DEBIT. 

$    164,800  

345,393  

336,995  

230,195  

742,793  

802,734  

893,034  

1,186,742  

517,034  

293,090  


28,500 

$305,840 

152,740  

Sessional  papers  of  the  Dominion  of  Canada,  1870,  No.  38,  pp.  6-8. 

13 


194  The  Canadian  Banking  System,  1817-1890 

the  distrust  prevailing  in  the  months  mentioned  is 
plainly  apparent  from  the  tables.  The  gain  of  the 
one  bank,  the  loss  of  the  others,  must  be  reckoned 
the  fifth  result  for  which,  in  great  measure,  the 
Provincial  Note  Act  was  directly  responsible. 

The  remoter  consequences  of  this  law  will  occa 
sionally  appear  in  subsequent  pages.  The  more  im 
mediate  effects  detailed  above  were  well  summarized 
in  a  single  sentence  by  Sir  Richard  J.  Cartwright, 
delivered  in  the  Dominion  House  of  Commons  the 
3d  December,  1867:1  "A  statute  more  offensive,  or 
more  deliberately  mischievous,  or  more  calculated  to 
prejudice  Upper  Canada,  it  was  impossible  to  con 
ceive." 

In  the  discussion  just  concluded  I  have  ventured 
somewhat  beyond  the  strict  limits  of  this  part  of  our 
history.  The  province  of  Canada  came  to  an  end 
the  1st  July,  1867,  when  the  territory  which  it  com 
prised  was  divided,  under  the  British  North  America 
Act  of  the  Imperial  Parliament,  into  the  prov 
inces  of  Ontario  and  Quebec,  and  these  two  were 
united  with  Nova  Scotia  and  New  Brunswick  into 
the  colonial  confederation  of  the  "  Dominion  of  Can 
ada." 

To  sum  up  the  growth  of  the  banks  under  the 
Union,  a  comparative  table  for  1841,  1851,  1861  and 
1867  is  annexed. 

deported  in  the  Ottawa  Times. 


Effects  of  the  Provincial  Note  Act 


195 


AGGREGATE  STATEMENT  OF  CHARTERED  BANKS  in  the  Province  of  Canada,  1841,  1851,  1861  and  1867. 

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LIABILITIES 

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ft  .    . 

GQ      .       . 

1 

a  Journal,  Can.,  1841  Appendix  O.  The  several  statements  from  which  the  to 
b  Tncludes  Farmers'  Joint  Stock  Banking  Co.  and  Vig-er.  De  Witt  et  Cie  privi 
Si°KUr?,a1'  c'iny,185V  Appendix  I,  No  1  to  8  inclusive.  Statements  are  fo?  3aj 
d  The  Canada  Waze/ie,  vol.  xx,  p.  175«i.  Statement  of  banks  acting  under  cha 

f  TM^  i  f  uMmni^  X1XV-i>  P"  ~"45-  stllteineilt  of  l«^ks  actftiS  under  ch 
/  This  Inoludes  £pO,000  stg.,  being  the  capital  allotted  by  the  Bank  of  British 
g  Provincial  Notes"  occurs  only  in  the  statement  for  1867. 

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Balances  due  from  other  banks  and  foreign  agencies  
Notes  and  bills  discounted..  . 

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Cash  deposits  bearing  interest  

Total  liabilities  

196  The  Canadian  Banking  System,  1817-1890 

NOTE. — RELATION  OF  THE  BANK  NOTE  ISSUE  TO  THE  PREROGATIVES 
OF  THE  STATE 

The  right  to  issue  promissory  notes,  payable  on  demand,  for  cir 
culation  as  money,  was  not  originally  a  government  or  crown  pre 
rogative,  either  in  Great  Britain  or  the  colonies.  It  was  the  com 
mon  law  right  of  any  one  who  chose  to  exercise  it.  The  preroga 
tive  of  drawing  cheques  or  bills  of  exchange,  or  giving  deposit  re 
ceipts  or  promissory  notes  payable  at  a  time  future,  could  have  been 
claimed  just  as  logically  as  that  of  issuing  bills  for  circulation.  These 
instruments  are  all  the  documentary  evidence  of  rights  to  demand, 
and  all  are  available,  all  are  used  to  affect  transfers  of  rights  to 
money  or  to  goods  expressed  in  terms  of  money.  They  are  distin 
guishable,  not  by  their  function,  but  merely  by  their  form  and  the 
different  degrees  of  credit  and  transferability  with  which  the  dif 
ferent  forms  are  endowed.  The  differences  in  the  legal  rules  re 
specting  them  rest  on  the  differences  in  the  place,  time  and  manner 
of  payment,  the  persons  to  whom  the  payment  is  made,  and  the 
persons  immediately  or  secondarily  liable  for  that  payment.  In 
questions  touching  the  economic  essence  of  transactions  in  such 
paper  the  general  rules  are  the  same.  Thus,  e.  g.,  where  the 
transfer  is  without  indorsement,  whether  it  be  a  sale  of  the 
bill  or  note,  or  an  exchange,  or  by  way  of  discount,  or  where  the 
assignee  agrees  expressly  to  take  it  in  payment,  he  can  neither  re 
cover  against  the  assignor  upon  the  bill,  nor  recover  back  the 
amount  given  for  it  on  account  of  failure  in  the  consideration,  un 
less,  indeed,  the  assignor  knew  the  bill  or  note  to  be  that  of  an  in 
solvent  when  he  assigned  it. l  The  same  principle  obtains  with 
regard  to  bank  notes.2 

But  the  difference  between  the  notes  of  a  solvent  bank  and  coined 
metal  or  a  legal  tender  government  currency,  is  one  that  cannot  be 
too  often  or  too  strongly  insisted  upon.  The  one  is  an  instrument  of 
credit,  a  mere  representative;  the  others,  lawful  money,  the  legal 
standard  of  value  and  the  legal  means  of  payment.  Bank  notes 
circulate  and  are  used  in  money's  stead,  with  like  effect,  only  by 
virtue  of  convention.  Current  bank  notes  are  a  lawful  tender  in 
payment  of  debts  only  when  the  creditor  does  not  object  to  them, 
as  not  money,  and  demands  payment  in  coin.  But  an  offer  of  cur 
rent  coin  or  government  currency  endowed  with  forced  circulation, 
whether  or  no  it  be  convertible  into  specie,  is  a  legal  tender  uncon 
ditionally.  In  short,  bank  notes  may  be,  money  must  be  accepted 
as  payment.  There  is,  therefore,  no  true  analogy  between  the  issue 

1  Daniel  on  Negotiable  Insteuments,  Fourth  Edition,  New  York,  1881,  §739. 
2 Ibid  §1678.    Cf.,  also,  Weir,  "The  Law  and  Practice  of  Banking  Corporations 
under  Dominion  Acts,1'  Montreal,  1888,  pp.  148-163. 


Bank  Note  Issue  and  State  Prerogative  197 

of  promissory  notes  payable  on  demand,  and  the  determination  and 
issue  of  the  standard  of  value  and  and  the  legal  tender,  as  an  exer 
cise  of  the  state's  sovereign  power.  To  premise  Hiich  an  analogy 
and  to  deduce  from  the  mint  prerogative  the  exclusive  right  of  the 
state  to  issue  a  convertible  fiduciary  currency,  is  a  process,  specious 
perhaps,  but  illogical,  unhistorical  and  dangerous.  The  true  ex 
planation  of  state  interference  with  matters  of  banking  and  the 
issue  of  bank  notes  is  to  be  found  in  the  general  powers  of  supervi 
sion  and  regulation  exercised  by  government  in  the  supposed  inter 
est  of  the  public,  and  in  the  conditions  which  government  has  been 
able  to  exact  in  return  for  the  concessions  sought  by  the  banks.1 

It  follows  that  two  of  the  propositions  implied  by  Mr.  Gait  when 
he  urged  that  the  government  should  resume  a  portion  of  the  rights 
which  they  had  deputed  to  others,  were  radically  incorrect.  These 
propositions  were:  first,  that  the  right  of  the  banks  to  issue  notes 
had  been  originally  derived  from  tire  government;  and,  second, 
that  the  prerogative  of  issuing  a  fiduciary  currency  pertained  to  the 
government. 

The  right  to  issue  bank  notes  existed  and  was  exercised  both  in 
Lower  and  Upper  Canada  before  banks  ever  became  a  subject  of 
legislation.  It  was  exercised  by  private  banks,  and  without  legisla 
tive  sanction,  for  a  considerable  period  after  the  early  charters  were 
granted.  And  in  1837-38  both  provinces  interfered  with  the  private 
note  issue,  not  as  an  infringement  on  government  prerogative,  but 
as  a  menace  to  the  public  security.  Upper  Canada  recognized  the 
worthy  private  banks,  and  permitted  them,  under  supervision,  to 
continue  their  business.  Lower  Canada,  through  the  Special  Coun 
cil,  prohibited  only  such  banks  as  would  not  obtain  licenses,  furnish 
and  publish  returns,  and  submit  to  the  regulations  imposed  by  law. 
The  chartered  banks  had  accepted  government  regulation  in  return 
for  the  concessions  of  incorporation,  the  currency  of  their  notes 
in  the  revenue,  assured  protection  against  forgery,  the  power 
easily  to  enforce  stock  subscriptions  and  the  like.  The  charters 
confirmed  and  limited  the  right  to  issue  notes,  but  they  could 

JChitty  on  the  Law  of  the  Prerogatives  of  the  Crown  (London,  1820)  contains 
no  mention  whatever  of  prerogatives  in  respect  to  the  currency  other  than  the 
establishment  of  the  standard  of  value  and  the  minting  of  specie.  The  lack  of 
prerogative  of  note  issue  in  the  positive  public  law  of  Great  Britain  was  satis 
factorily  established  by  Tooke,  in  his  "  History  of  Prices."  Cf.  also  Wagner, 
"  Die  Geld-  u.  Credit-theorie  der  Peel'schen  Bank  Acte,"  Wien,  1862,  pp.  65,  73, 84. 

Confirmation  of  the  principles  just  formulated  in  the  text  will  be  found,  for 
the  first,  in  the  preamble  of  the  act  to  protect  the  public  against  injury  from 
private  banks,  quoted  on  p.  74  ;  for  the  second  in  the  statements  of  the  petitions 
for  incorporation  presented  to  the  legislature  of  Lower  Canada  in  1821,  and  in 
the  preambles  of  the  charters  passed  in  answer  to  the  prayers,  p.  27,  svpra. 


198  The  Canadian  Banking  System,  1817-1890 

not  depute  it.  For  the  Lower  Canada  banks,  at  least,  it  was  a  pre 
existing  right  which  they  had  already  exercised.  The  first  proposi 
tion  implied  by  Mr.  Gait  is,  therefore,  not  to  be  accepted.1 

In  the  second  place,  the  power  to  issue  a  fiduciary  currency  con 
currently  with  the  banks,  or  even  the  right  to  emit  a  legal  tender 
paper,  had  never  been  independently  exercised  by  a  Canadian  gov 
ernment  either  before  or  after  the  Union.  The  Army  Bills  of  1812- 
15  are  not  a  pertinent  case,  inasmuch  as  in  that  affair  the  initiatory 
steps  were  taken  by  the  commander  of  the  troops,  sent  out  from 
England,  and  the  transactions  conducted  largely  under  his  direction. 
What  the  local  legislatures  did  was  to  give  the  bills  currency.  I  will 
not  deny  that  the  right  existed,  for  in  Nova  Scotia  there  were 
outstanding  some  £100,000  of  provincial  notes,  which  were  a 
legal  tender  under  certain  circumstances  in  payment  of  debts 
due  by  the  government.  But  to  the  theory  of  its  possession 
by  the  Upper  Province  before  the  Union,  the  refusal  of  the 
imperial  authorities  in  1339  to  allow  the  issue  of  legal  tender 
notes  payable  in  one  year  after  date,  is  a  serious  obstacle  of 
fact.  Lord  Sydenham's  proposals  in  1841  were  for  the  creation 
of  a  Bank  of  Issue,  not  of  a  currency  issued  directly  by  the  govern 
ment.  The  nearest  approach  to  Mr.  Gait's  scheme  was  the  device 
employed  by  Sir  Francis  Hincks  in  1848-49,  viz.,  the  payment  of 
current  debts  of  the  government  in  short  date,  interest-bearing 
debentures  for  small  sums,  negotiable  only  under  par.  Yet  this,  or 
anything  else  revealed  by  rather  careful  research  into  the  history 
of  Canada  previous  to  1866,  will  not  satisfactorily  establish  the 
actual  existence  of  a  government  right  to  emit  fiduciary  currency. 
Much  less  will  it  justify  the  pretence  of  a  government  prerogative 

}I  am  aware  that  this  position  is  quite  opposed  to  that  held  by  the  late  Premier 
of  the  Dominion,  Sir  John  A.  Macdonald.  Speaking  to  the  House  of  Commons 
the  4th  April,  1880,  in  reply  to  Mr.  Mills,  of  Bothwell,  upon  the  currency  resolu 
tions  brought  down  by  the  Minister  of  Finance,  Sir  Leonard  Tilly,  he  said  :  "  If 
it  was  admitted  that  the  same  power,  sovereignty  and  nation,  had  the  right  to 
issue  gold  or  any  other  circulating  medium,  it  must  of  necessity  have  the 
right,  if  it  chose  to  claim  it,  of  issuing  what  was  equal  to  gold  and  silver."  Then, 
after  a  reference  to  the  undisputed  prerogative  of  the  state  to  prepare  or  cause 
to  be  prepared  coins  of  gold,  silver,  copper  or  what  not,  and  give  them  legal 
currency,  "If  paper  promises  to  pay  were  accepted  as  equal  to  gold  and  silver, 
the  argument  was  clear."  He  had  always  thought  the  people  and  the  govern 
ment  synonymous.  The  banks  had  no  vested  right  to  issue,  the  right  to  make 
money  is  in  the  Crown— in  the  people.  "It  was  a  matter  of  grace,  of  expe 
diency,  of  legislation,  by  which  the  Crown  gave  up  a  portion  of  its  exclusive 
right  to  issue  what  is  called  money  to  the  banks,  whether  private  or  public." 
— But  it  is  easy  to  judge  from  this,  how,  by  a  false  analogy,  the  great  states 
man  confused  money  with  those  instruments  of  credit  which,  in  a  popular 
sense,  are  often  spoken  of  as  money,  and  are  conventionally  used  in  substitution 
for  it.  Resting,  as  it  does,  upon  this  fallacy,  even  Sir  John  Macdouald's  reason 
ing  cannot  be  approved.  We  must  still  reject  the  theory  of  a  crown  preroga 
tive  of  issue. 


Bank  Note  Issue  and  State  Prerogative  199 

of  note  issue.  The  second  proposition  implied  by  Mr.  Gait  fails  as 
completely  as  his  first. 

For  the  discussion  of  a  bank  note  currency,  or  of  any  currency,  it 
is  indispensable  to  rest  upon  the  correct  theoretical  and  legal  basis. 
Once  it  is  recognized  that  the  business  of  issuing  notes  for  circula 
tion,  promising  payment,  and  payable  upon  demand,  is  essentially 
similar  to  any  other  business  in  instruments  or  forms  of  credit — 
once  it  is  seen  that,  historically  and  practically,  note  issue  is  no 
more  a  prerogative  of  government  than  life  insurance,  receiving 
deposits  at  call,  or  drawing  foreign  exchange,  the  way  is  barred  to 
many  a  fallacy  and  delusion.  The  cry  that  "the  profits  of  the  cir 
culation  should  belong  to  the  government,"  then  appears  no  less 
ridiculous  than  the  plaint,  "the  profits  of  the  flour  mills,  the  shoe 
factories,  the  building  societies,  should  belong  to  the  government." 
The  business  of  note  issue,  rightly  conducted,  requires  capital  just 
as  other  economic  activities;  like  them,  it  pays  profits,  for  the  saving 
of  the  interest  on  a  currency  of  intrinsic  value  accrues,  in  the  first 
instance,  directly  to  the  issuers.  The  public,  however,  derive  advan 
tage  from  this  saving,  as  they  gain  from  other  economies  and  im 
provements  in  production,  viz.,  through  the  reduced  costs  of  pro 
duction  and  the  consequent  lower  prices  to  consumers.  Those  who 
deal  with  the  banks  get  their  services  at  rates  which,  without  the 
issue  profit,  would  be  impossible.  With  those  who  do  not  so  deal, 
the  gains  of  those  who  do  are  divided  through  the  cheapening  of 
the  commodities  exchanged  or  produced  with  the  assistance  of  the 
banks.  Under  a  regime  of  competition,  the  capital  invested  in  a 
bank  of  issue  cannot,  in  the  long  run,  earn  a  higher  return  than  other 
capital  invested  at  equivalent  risks. 

The  contracts  which  result  from  issue  operations,  must  be 
enforced,  like  other  contracts,  by  the  legal  and  judicial  organization 
of  the  state.  To  provide  for  the  security  of  such  contracts,  prevent 
frauds  and  avert  public  injury,  the  government  may  regulate  and 
supervise  the  note  issue  as  it  does  the  operations  of  common  car 
riers,  insurance  companies  and  monied  corporations  of  other  kinds. 
The  gain  from  the  note  issue,  in  common  with  other  income,  will 
be  a  legitimate  subject  for  taxation,  but  not  for  such  as  violates  the 
canons  of  equality  and  uniformity.  If  a  necessitous  government  is 
constrained  to  derive  greater  revenue  from  the  note  issue  than  is 
possible  by  leaving  it  in  private  hands,  it  may  by  the  exercise  of 
sovereign  power,  exclude  all  but  itself  from  this  department  of  eco 
nomic  activity.  This  practically  is  what  many  European  states 
have  done.  But  those  who  guide  a  nation's  policy  may  well  weigh 
carefully  the  commercial  disadvantages  attending  such  a  usurpation, 
and  the  tendencies  towards  forced  circulation,  fiat  money,  depreci 
ation  and  repudiation  which  it  is  likely  to  release. 


CHAPTER  VI 
NEW  BRUNSWICK  AND  NOVA  SCOTIA 

§33. THE  BANK  CHARTERS  OF  NEW  BRUNSWICK 

THE  first  bank  established  in  this  province  was  char 
tered  as  the  President,  Directors  and  Company  of  the 
Bank  of  New  Brunswick,  by  an  act  of  the  local  leg 
islature,  which  received  royal  assent  the  25th  March, 
1820.  As  expressed  in  the  preamble,  it  was  the 
opinion  of  the  House  of  Assembly  that  "the  estab 
lishment  of  a  bank  in  the  city  of  St.  John  will  pro 
mote  the  interests  of  the  Province  by  increasing  the 
means  of  circulation."  (60  Geo.  Ill,  cap  13.  N.B.) 
The  capital  stock  was  limited  to  £50,000,  and  the 
payment  of  the  whole  required  within  eighteen 
months.  In  1821  the  stock  limit  was  reduced  to 
£30,000,  and  four  years  later  raised  again  to  £50,000, 
on  "account  of  the  increase  of  the  trade  of  the  Prov 
ince."  The  President,  Directors  and  Company  of 
the  Charlotte  County  Bank,  to  be  situate  at  St.  An 
drews,  were  incorporated  in  1825,  with  a  capital 
stock  of  £15,000,  all  to  be  paid  up  within  a  year  and 
a  half .  (2  Geo.  IV,  cap.  20.)  Both  these  banks 
were  smaller  than  those  established  in  Montreal, 
Quebec  and  York  in  1817,  1818  and  1822,  and  it  is 
manifest  that  they  were  intended  to  be  local  affairs, 
but  the  New  Brunswick  charters  are  different  in 
only  a  few  essential  respects  from  those  passed  in 
Upper  and  Lower  Canada.  The  limitation  upon  the 


The  Bank  Charters  of  New  Brunswick  201 

total  debts  which  might  be  owed  by  these  corpora 
tions  was  more  strict,  being  twice  the  amount  of 
their  paid-in  capital  stock,  and  the  term  of  their  char 
ters  was  twenty  years.  In  1834  the  Central  Bank 
of  New  Brunswick  was  incorporated,  and  provision 
made  for  establishing  it  at  Fredericton.  (4  Wm.  IV, 
cap.  44.)  The  act  of  incorporation  contained  a  num 
ber  of  new  provisions  similar  in  effect  to  those  re 
commended  by  the  Committee  for  Trade  of  His  Maj 
esty's  Privy  Council  in  1830  and  1833. 

No  bank  bill,  e.  g.,  was  to  be  issued  until  £7,500 
(one-half  the  authorized  stock)  were  paid  in.  The 
Governor  was  empowered  to  appoint  commissioners 
who  should  count  the  money  in  the  vaults  and  ascer 
tain  whether  it  were  bond  fide  capital.  (This  author 
ized  stock  was  raised  in  1836  to  £50,000.)  The 
stockholders  were  made  chargeable  in  their  private 
and  individual  capacities  for  the  payment  and  re 
demption  of  any  bills  issued  by  the  corporation,  and 
for  the  payment  of  all  debts  at  any  time  due  from 
the  corporation,  in  proportion  to  the  stock  they  should 
respectively  hold,  but  not  to  exceed  the  amount  of 
the  stock  actually  held  by  them,  nor  in  exemption  of 
the  joint  stock  of  the  corporation  from  liability  for 
its  debts  and  engagements.  Loans  on  the  pledge  of 
the  bank's  own  stock  were  forbidden.  Provisions 
were  introduced  with  respect  to  the  distribution  of 
the  capital  stock  and  profits  among  the  shareholders 
in  case  of  dissolution  of  the  bank,  and  to  the  contin 
uation  of  their  liability  to  redeem  the  notes  in  circu 
lation  for  two  years  and  no  longer  after  the  date  of 
the  dissolution.  Debts  of  the  directors  to  the  bank, 
either  as  principals,  sureties  or  indorsers,  were  limited 
to  one-third  of  the  paid-in  capital  stock,  and  semi- 


202  The  Canadian  Banking  System,  1817-1890 

annual  returns  to  the  Secretary  of  the  province  were 
required.  No  note  or  bill  offered  for  discount  was  to 
be  excluded  by  a  single  vote.  A  list  of  the  delin 
quents  was  to  be  furnished  to  the  board  upon  dis 
count  days,  and  the  presence  of  his  name  in  the  list 
was  to  disqualify  any  director  from  sitting  on  the 
board. 

In  1834  the  Commercial  Bank  of  New  Brunswick 
was  incorporated  by  letters  patent.1  The  charter  of 
the  St.  Stephen's  Bank  passed  in  1836  (6  Wm.  IV, 
cap.  32)  created  a  corporation  capitalized  for  £25,000 
and  subjected  to  the  provisions  already  described.  It 
added  the  rules  that  no  stockholder  should  own  more 
than  twenty  per  cent,  of  the  capital  stock  and  that 
"no  action  shall  be  brought  or  maintained  upon  any 
bank  bill  or  bank  note  issued  by  the  corporation,  be 
fore  such  bill  or  note  shall  have  been  presented  at 
the  bank  for  payment,  and  default  in  payment  there 
upon  shall  take  place."  Upon  shares  seized  and  sold 
under  execution,  the  bank  did  not  enjoy  the  prior 
claim  for  stockholder's  debts  which  it  could  enforce 
before  transfers  of  stocks  in  other  ways  became 
valid.  The  limitation  upon  total  debts  was  altered 
by  excluding  deposits  from  the  amount  which  should 
exceed  twice  the  capital  stock  paid-in.  The  City 
Bank  was  incorporated  the  same  year.  Its  location 
was  to  be  St.  John;  its  capital  £100,000,  half  to  be 
paid  in  one  year,  and  half  within  five  years.  But  the 
City  Bank  had  a  short  existence.  The  Bank  of  New 
Brunswick  received  permission  to  double  its  capital 
in  1837,  and  was  subjected  to  new  provisions  similar 
to  those  detailed.  (6  Wm.  IV,  cap.  57.)  By  an  act 

aActs  of  the  General  Assembly  of  the  Province  of  New  Bruns 
wick,  1853,  p.  81. 


The  Bank  Charters  of  New  Brunswick  203 

of  1839  the  City  Bank  was  united  to  the  Bank  of  New 
Brunswick  and  merged  within  it.     (2  Vic.,  cap.  26.) 

The  year  1837,  however,  was  not  altogether  one  of 
diminished  banking  competition.  The  legislature  in 
this  session  granted  the  Bank  of  British  North 
America  powers  to  sue  and  be  sued  in  the  name 
of  a  local  officer,  and  facilitated  its  business  in  other 
ways.  (8  Wm.  IV,  cap.  16.)  Afterwards,  between 
1841  and  1866,  various  additions  to  the  capital  stock 
of  the  four  existing  banks  were  permitted,  and  their 
charters  extended  to  dates  between  1870  and  1876. 
The  Shediac  Bank  was  incorporated  in  1857  (19  Vic., 
cap.  66),  the  Miramichi  Bank  in  1857  (20  Vic.,  cap.  28), 
and  the  People's  Bank  of  New  Brunswick  in  1864. 
The  Miramichi  Bank  was  proposed  for  Chatham,  N. 
B.,  and  the  authorized  capital  was  £20,000.  The 
People's  Bank  was  established  at  Fredericton  with  a 
capital  stock  of  $60,000. 

In  this  and  the  subsequent  legislation,  provision 
was  made  for  increasing  the  capital  stock  of  the 
banks  upon  the  initiative  of  the  shareholders  and 
without  further  legislative  sanction.  New  stock  was 
always,  according  to  law,  to  be  disposed  of  at  auction, 
and  the  premium  paid  upon  it  divided  pro  rata  among 
new  and  old  shareholders.  But  in  other  respects  the 
bank  charters  granted  in  1856,  1857  and  1864  are  in 
no  way  different  from  those  of  1834  and  1836.  All 
the  banks,  however,  had  been  forbidden  by  an  act 
of  1838  (1  Vic.,  cap.  18),  to  issue  notes  of  a  less  denom 
ination  than  five  shillings  or  notes  of  denominations 
not  multiples  of  that  sum.  For  violation  of  the  act 
there  was  imposed  a  penalty  of  £25,  recoverable  in 
courts  of  competent  jurisdiction  by  the  first  person 
suing  therefor,  one-half  for  himself  and  one-half  to 


204  The  Canadian  Banking  System,  1817-1890 

the  use  of  the  province.  Receiving  the  notes  and 
checks  denounced  by  the  act  rendered  one  liable  to 
forfeit  a  sum  equal  to  the  nominal  value  of  the 
instrument. 

Some  years  previous  to  1865,  the  Charlotte  County 
Bank  ceased  its  operations  and  business  and  paid  off, 
so  far  as  they  had  been  presented,  all  claims  upon  it. 
In  the  year  named  it  was  authorized,  after  newspaper 
notice  for  twenty-four  months,  to  wind  up  its  affairs, 
and  divide  the  assets  remaining  among  the  share 
holders,  the  further  liability  of  whom  for  the  debts 
of  the  bank  was  thereupon  to  cease  and  determine. 
(28  Vic.,  cap.  44.)  A  similar  act  was  passed  in  1868 
with  respect  to  the  Central  Bank  of  New  Brunswick. 
(31  Vic.,  cap.  56.)  In  the  sessions  of  1865  and  1867, 
on  the  contrary,  the  establishment  of  a  number  of 
new  corporations  was  authorized;  the  Albert  Bank, 
the  Woodstock  Bank,  the  Northern  Bank,  the  Mer 
chants'  Bank  of  New  Brunswick  and  the  Eastern 
Bank  of  New  Brunswick  were  all  granted  charters. 
I  am  not  aware,  however,  that  to  any  of  these  under 
takings  was  subscribed  and  paid  the  capital  required 
by  law  before  they  could  begin  business.  In  this 
they  were  as  unsuccessful  as  the  Miramichi  and 
Shediac  banks  of  the  preceding  decade. 

At  the  time  that  New  Brunswick  entered  the  Con 
federation  the  Bank  of  New  Brunswick,  the  Commer 
cial  Bank  of  New  Brunswick,  the  St.  Stephen's  Bank 
and  the  People's  Bank  were  in  operation,  the  West- 
jmoreland  Bank  in  liquidation,  and  the  five  other 
charters  just  named  were  still  available. 


Nova  Scotia  205 

§34. NOVA    SCOTIA 

The  Banks  in  Nova  Scotia  were  neither  so  many 
nor  so  old.  The  establishment  of  a  bank  at  Halifax 
had  been  mooted,  to  be  sure,  in  1801,  and  £50,000  of 
the  capital  subscribed,  but  it  was  proposed  in  this 
connection  that  no  other  bank  should  be  established 
by  any  future  law  of  the  province  during  the  contin 
uation  of  the  corporation.  The  feature  of  monopoly 
was  probably  fatal  to  the  plan's  success,1  as  the  bank 
was  not  started.  Another  project  for  a  joint  stock 
bank  was  published  by  the  Halifax  Committee  of 
Trade  in  February,  1811,  but  no  action  was  taken  in 
the  matter  by  the  Assembly.2  In  1825,  however,  a 
private  bank  of  issue,  discount  and  deposit  was 
started  in  Halifax,  the  advertisement  of  opening, 
upon  the  3d  September,  being  signed  by  eight  part 
ners.3  This  was  the  Halifax  Banking  Company, 
which  in  1872  was  sold  out  to  the  present  chartered 
bank  of  the  same  name. 

There  can  be  little  doubt  that  the  extension  of  the 
banking  system  was  somewhat  delayed  by  the  circu 
lation,  as  money,  of  the  Treasury  notes  of  the  pro 
vince.  Since  1812  the  province  had  had  in  these  a 
paper  currency  which  was  seldom,  in  large  amounts, 
immediately  convertible  into  specie,  and  never,  in 
point  of  elasticity,  comparable  to  a  bank  note  circu 
lation.  Yet  it  sufficed  to  work  a  certain  economy  of 
specie,  to  give  some  help  to  the  Treasury,  and  to 
serve  the  colonists  as  a  medium  of  exchange  at  a 
time  when  the  specie  circulation  was  neither  abund 
ant,  uniform  nor  satisfactory.4 

1  Murdoch,  "History  of  Nova  Scotia,"  vol.  iii,  p.  205. 
2 Ibid,  p.  308. 
3lbid,  p.  538. 

4The  principal  details  of  the  Treasury  Notes  legislation  are  given 
in  the  note  at  the  end  of  this  chapter. 


.206  The  Canadian  Banking  System,  1817-1890 

Finally,  the  legislature  became  convinced  that  the 
"establishment  of  a  public  bank  will  be  greatly  ad 
vantageous  to  trade  and  commerce,  and  otherwise 
advance  the  interests  of  the  province  by  increasing 
the  circulating  medium  of  business,  and  promoting 
a  more  extensive  and  beneficial  employment  of  the 
resources  and  industry  of  all  classes  of  its  inhabi 
tants."1 

To  further  such  purposes,  and  to  grant  the  prayer 
of  certain  petitioners,  the  Bank  of  Nova  Scotia,  the 
first  chartered  bank  in  the  province,  was  incorpo 
rated  by  an  act  approved  the  30th  March,  1832.  (2 
Wm.  IV,  cap.  50,  N.  S.)  Its  authorized  stock  was 
£100,000  in  2,000  shares  of  £50  each.  Business 
might  begin  when  £50,000  were  subscribed  and  paid 
up  in  specie  or  Treasury  notes.  Land  might  be 
owned  in  fee  simple  to  the  value  of  £5,000.  But 
loaning  upon  the  bank's  own  stock,  upon  mortgage 
or  upon  real  estate,  was  prohibited.  Each  director 
was  required  to  hold  twenty  shares,  and  might  not 
be  a  director  in  any  other  bank  either  within  or 
without  the  province.  Shareholders  with  one  to  two 
shares  had  one  vote.  For  more  than  two  shares  they 
voted  according  to  a  scale  by  which  the  holder  had 
one  vote  for  each  two  shares  above  two  and  not  above 
twelve,  for  each  three  above  twelve  and  not  above 
thirty,  one  vote,  and  for  each  five  above  thirty,  one 
vote;  but  no  shareholder  was  allowed  more  than 
fifteen  votes,  or  to  hold  more  than  three  proxies. 

In  case  of  loss  or  deficiency  in  the  capital  stock  of 
the  bank  on  account  of  the  official  mismanagement 
of  the  directors,  the  shareholders  were  liable  for 
debts  of  the  bank  in  their  private  and  individual 

1  Vide  preamble,  2  Wm.  IV,  cap.  50,  N.  S. 


Nova  Scotia  207 

capacities,  but  not  liable  to  pay  a  sum  exceeding  the 
amount  of  stock  actually  held  by  them  respectively, 
in  addition  to  the  stock  so  held.     This  was  the  Nova 
Scotian  expression  for  the  double  liability  of  stock 
holders,    adopted    by    New    Brunswick    in    slightly 
different  phrase  a  few  years  later.     The  debts  of  the 
corporation,  exclusive  of  the  sum  due  on  account  of 
deposits,  were  limited  to  thrice  the  amount   of   the 
capital  stock  paid  in.     As  in  New  Brunswick,  this 
restriction  was  the  only  limit  upon  the  amount  of  the 
notes  which  might  be  issued.     In  case  of  excess,  both 
the    corporate    property,  and   the    directors  in  their 
individual  and  several  capacities,  were  to  be  liable. 
The   bills   and    notes  of  the   corporation  were   to   be 
payable  on  demand   in   gold   and   silver.     Notes  for 
less  than  twenty-six  shillings  were  forbidden.    If  the 
bank  should  refuse  to  redeem  its   notes  in  specie,  it 
incurred   the   penalty  of   paying  interest   at   12  per 
cent,  per  annum  upon  their  face  value,  from  the  time 
of  refusal  to  the  time  of  payment.     A  statement  of 
the  bank's  affairs  was  to  be  made  to  the  annual  meet 
ing  of  the  shareholders,  and  a  copy  sent  to  the  Sec 
retary  of  the  province.     Either  by  order  of  the  Gov- 
ernor-in-Council    or    by   a   joint    committee    of    the 
Legislative    Council    and    House    of    Assembly,    the 
bank  might  be  investigated.     And  if  it  should  then 
appear  that  the  capital  stock  had  been  diminished  by 
loss  and  bad  debts  to  half  the  sum  subscribed,  it  was 
provided  that  the  corporation  should  be  dissolved. 

Such  were  the  important  provisions  of  the  first 
bank  charter  passed  in  Nova  Scotia.  The  structure 
of  the  corporation,  its  powers  and  the  restrictions 
upon  it  were  of  the  same  general  type  as  with  the 
banks  of  the  other  provinces.  There  is  no  need  to 


208  The  Canadian  Banking  System,  1817-1890 

describe  in  complete  detail  legislation  so  like  that 
already  familiar.  But  in  (a)  the  stipulations  for 
payment  of  capital,  (b)  the  double  liability  of  share 
holders,  (c)  the  minimum  placed  upon  the  denomina 
tion  of  bank  notes  issued,  (d)  the  penalty  for  sus 
pending  specie  payments,  and  in  (e)  the  provision  for 
winding  up  the  bank  in  case  the  stock  were  badly 
impaired,  the  "charter  is  distinctly  in  advance  of  any 
previously  passed  by  other  British  North  American 
provinces,  and  in  force  in  1832.  In  the  first  three  of 
these  peculiar  restrictions,  the  reader  will  unques 
tionably  detect  the  influence  of  the  suggestions  made 
by  the  Committee  of  the  Privy  Council  for  Trade  in 
1830.  The  purpose  of  the  fourth  and  fifth  is  evi 
dently  the  same  as  that  sought  by  the  imperial  au- 
thrities,  viz.,  maintenance  of  redemption  and  preser 
vation  of  a  capital  guarantee,  but  the  means  most 
closely  resemble  those  adopted  in  the  legislation  of 
Massachusetts. 

For  five  years  the  Bank  of  Nova  Scotia  was  the 
only  chartered  bank  in  the  province.  In  its  first  ten 
years  it  divided  among  the  shareholders  profits  at  the 
average  rate  per  annum  of  8.9  per  cent,  of  its  capi 
tal,  and  increased  that  capital  to  £140,000. l  After 
1842,  however,  dividends  rarely  exceeded  6  percent. 

One  reason  was  the  competition  of  the  Bank  of 
British  North  America,  which  had  begun  business  in 
Nova  Scotia  in  1837,  and  secured  the  right  to  sue  and 
be  sued  in  the  name  of  a  local  officer  in  1838.  (1 
Vic.,  cap.  24.)  Then  there  was  the  statute  of  1834 
(4  Wm.  IV,  cap.  24),  which  prohibited  the  issue  of 
bank  notes  for  sums  less  than  £5,  and  thus  closed  to 

Journal  of  the  House  of  Assembly  of  the  Province  of  Nova 
Scotia,  1846,  Appendix  18. 


Nova  Scotia  209 

the  banks  the  profitable  and  important  business  of 
circulating  the  one  and  two  pound  notes  necessary 
for  retail  exchanges.  It  also  provided  that  all  bank 
notes  should  be  made  payable  in  gold  and  silver  to 
the  amount  of  their  face  value  to  the  bearer  or 
holder  of  the  undertaking  and  upon  demand,  or  bear 
interest  at  12  per  cent,  per  annum  from  the  day  of 
refusal  to  the  day  of  final  payment.  Notes  payable  to 
real  or  fictitious  persons  and  transferable  by  indorse 
ment  were  made  negotiable  by  delivery  merely  and  the 
indorsement  declared  unnecessary.  The  penalty  of 
£10  imposed  for  each  note,  bill  of  exchange,  draft  or 
check  issued  for  less  than  £5,  was  recoverable  by  ac 
tion  for  debt,  one-half  to  the  prosecutor  and  one-half 
to  the  Crown.  Forgery  of  the  notes  was  punished  by 
not  more  than  seven  years  in  the  Bridewell  at  hard 
labor,  and  all  the  costs  of  prosecution;  theft,  by  the 
same  penalties  as  were  imposed  for  stealing  other 
things  of  equal  value . 

Another  cause  of  the  lower  profits  of  the  Bank  of 
Nova  Scotia  may  be  found  in  the  constitutional  strug 
gle  which  was  carried  on  in  the  province  in  the  earlier 
part  of  this  period,  and  the  commercial  disturbances 
due  to  it.  To  compel  the  executive  annually  to  con 
vene  it,  the  legislature  adopted  the  policy  of  con 
tinuing  necessary  acts  for  one  or  two  years  only. 
Between  1841  and  1846  the  charter  of  the  Bank  of 
Nova  Scotia  and  the  amending  act  of  7  Wm.  IV,  were 
thus  continued  no  less  than  five  times,  in  order 
annually  to  prevent  their  expiry. 

At  last,  in  1847,  the  charter  was  continued  for  ten 
years.  The  form  of  semi-annual  returns  to  the  gov 
ernment  recommended  by  the  Lords  of  the  Treasury 
was  adopted,  and  the  penalty  of  charter  forfeiture 
14 


210  The  Canadian  Banking  System,  1817-1890 

imposed  for  note  issue  in  excess  of  the  statutory 
limit  (thrice  the  capital  stock  paid  up).  (10  Vic., 
cap.  57,  1ST.  S.)  The  charter  was  again  extended  in 
1856  for  a  period  of  15  years,  and  permission  granted 
to  increase  the  capital  stock  to  £400,000.  (19  Vic., 
cap.  95.)  By  another  act  of  the  same  session,  the 
legislature  incorporated  the  Union  Bank  of  Halifax. 
In  1859  the  Bank  of  Yarmouth  was  chartered;  in 
1864  the  People's  Bank  of  Halifax,  and  the  Mutual 
Bank  of  Nova  Scotia;  and  in  1865  the  Commercial 
Bank  of  Windsor.1 

These  later  charters  repeated  almost  verbatim  the 
provisions  of  the  amended  act  governing  the  Bank 
of  Nova  Scotia.  The  banking  system  as  originally 
worked  out  caused  so  few  difficulties  and  promoted 
so  much  the  convenience  and  prosperity  of  the  col 
onies,  that  they  felt  very  little  temptation  to  change 
it.  The  banking  history  of  Nova  Scotia,  therefore, 
is  not  eventful.  The  private  banks  carried  011  all 
branches  of  banking,  including  note  issue,  in  com 
petition  with  the  chartered  banks.  Their  proprietors 
were  men  of  wealth;  they  enjoyed  the  confidence  of 
the  community,  and  conducted  their  business  accord 
ing  to  recognized  banking  principles.  The  currency 
law,  with  its  penalty  for  suspending  specie  payment, 
sufficed  to  keep  the  note  circulation  secure  and  within 
proper  bounds.-  Down  to  1873  a  bank  had  never 

aFor  these  banks  the  charters  provided 

Required  to 

Authorized     Charter          be  paid  up 
Capital         Expires      before  begin 
ning  business 

Union  Bank  of  Halifax £250,000  1871  £50,000 

Exchange  Bank  of  Yarmouth       50,000  1871  12,500 

People's  Bank  of  Halifax. . . .    $400,000  1879  $100,000 

Mutual  Bank  of  Nova  Scotia.  1,000,000  1869  250,000 

Commercial  Bank  of  Windsor    200,000  1885  50,000 


Relation  to  Bank  Legislation  of  the  Dominion        211 

failed  in  the  province  of  Nova  Scotia,  nor  had  the 
finger  of  suspicion  been  pointed  at  any  of  them, 
either  chartered  or  private.1  When  the  province 
joined  the  Confederation  five  banks  were  acting  un 
der  local  charters,  viz.:  the  Bank  of  Nova  Scotia, 
Bank  of  Yarmouth,  People's  Bank  of  Halifax, 
Union  Bank  of  Halifax,  Merchants'  Bank  of  Halifax 
and  Exchange  Bank  of  Yarmouth;  the  charter  of  the 
Commercial  Bank  of  Windsor  was  still  available. 


§  35. RELATION  OF  BANK  LEGISLATION  IN  THE  MARI 
TIME  PROVINCES  TO  THAT  OF  THE    DOMINION 

I.  In  the  two  greater  provinces  whose  bank  char 
ters  have  been  discussed,  we  found  that  the  first 
legislation  was  shaped  on  almost  the  same  lines  as 
that  of  the  Canadas.  Still,  the  banking  history  of 
Nova  Scotia  and  New  Brunswick  is  much  simpler. 
The  system  originally  established  was  subjected  to 
no  such  energetic  and  repeated  attacks,  either  by 
scheming  individuals  or  by  the  government  of  the 
day,  as  we  meet  in  the  provinces  of  Upper  Canada 
and  Canada.  On  the  other  hand,  we  may  detect  a 
certain  similarity  in  the  forces  moving  in  the  later 
stages  for  the  improvement  of  the  system.  Whether 
the  safeguards  latterly  inserted  in  bank  charters 
were  a  purely  local  development,  is  a  question  that 
hardly  needs  to  be  raised  in  the  cases  of  New  Bruns 
wick  and  Nova  Scotia.  The  constitutional  govern 
ments  of  these  provinces  were  in  no  substantial 
respects  different  from  that  of  the  Canadas.  The 
eastern  colonies  were  kept  in  pretty  much  the  same 

1Journal  of  the  House  of  Commons,  Canada,  1869,  Appendix  I, 
p.  62,  Evidence  of  Messrs.  Rowley,  Killam  and  Lewin. 


212          The  Canadian  Banking  System,  1817-1890 

sort  of  tutelage  by  the  Colonial  Office  in  Downing 
street  as  those  in  the  West.  We  know  that  the 
Treasury  regulations  were  transmitted,  as  circulars, 
to  the  colonies  generally,  with  instructions  for  their 
observance.  Lord  John  Russell's  despatch  of  1840 
appears  in  the  legislative  documents  of  New  Bruns 
wick.  Reference  to  the  actual  statutes  shows  that 
subsequently  to  the  receipt  of  the  Treasury  regula 
tions,  provision  was  made  in  bank  charters  that  the 
spirit  of  the  more  essential  rules  should  be  observed. 

II.  As  Newfoundland  is  no  part  of  the  Dominion, 
it  is  unnecessary  to  treat  of  banking  there.     Prince 
Edward  Island,  though  within  the  Confederation,  is 
of  no  such  importance  that  its  banking  laws  could 
have  affected  the  measures  adopted  by  the  Dominion. 
We  may,  accordingly,  disregard  the  banking  history 
of  this  colony  until  it  becomes  a  part  of  the  broader 
study. 

III.  Even  Nova  Scotia  and  New  Brunswick,  before 
the  Confederation,  were,  in  great  measure,  self-con 
tained  communities.     Though  exporting  some  natural 
products  and  buying  manufactured  supplies  abroad, 
they  were  not,  on  the  whole,  strongly  affected  by  the 
commercial  movements   in  other  parts  of  the  world. 
Nova  Scotia,  for  instance,  suffered  practically  nothing 
from  the  crises  of  1837  and  1857.     New  Brunswick, 
however,  experienced  severe  commercial  depression 
in  1848,  in  consequence  of  heavy  importations  during 
the  preceding  period,  and  a  falling  off  in  the  demand 
for  its  principal  exports. 

Banking  was  chiefly  confined  to  the  cities  of  St. 
John  and  Halifax,  and  two  or  three  of  the  seaports 
next  in  importance.  The  other  towns  carried  011 
their  business  through  the  cities.  Branch  banking 


Relation  to  Bank  Legislation  of  the  Dominion        213 

had  not  yet  received  that  extension  which,  since 
confederation,  has  brought  the  office  of  a  strong  bank 
to  every  town  and  almost  every  considerable  village. 
Besides  the  ordinary  business  of  receiving  deposits, 
issuing  notes  and  discounting  for  local  purposes,  the 
banks  enjoyed  a  profitable  business  in  exchange. 
The  trade  with  Upper  and  Lower  Canada  was  small, 
but  they  bought  and  sold  large  amounts  of  bills  upon 
Boston,  New  York  and  London.  During  the  period 
of  reciprocity  the  American  trade  was  especially 
important,  as  that  market  for  fish  and  timber  was 
wide  and  active.  Indeed,  the  principal  business  of 
Nova  Scotia  at  this  time  was  shipping  fish  and  timber 
to  the  West  Indies  and  the  United  States.  The 
returns  from  these  shipments  were  mostly  in  sterling 
exchange,  which  was  sent  to  London  and  drawn 
against  to  pay  for  dry  goods,  hardware  and  other 
colonial  necessities.  The  banks  also  obtained  large 
amounts  of  sterling  bills  from  the  imperial  authori 
ties  at  Halifax  in  exchange  for  specie  to  pay  the 
troops  and  buy  supplies  for  the  garrisons. 

The  growth  of  business  between  1832  and  1841 
was  especially  remarkable  in  New  Brunswick.  It  is 
best  illustrated  by  the  returns  made  to  the  provincial 
governments  in  these  years.  For  purposes  of  com 
parison,  returns  for  1851,  1861  and  1867  are  given 
in  the  same  table.  Such  returns  of  Nova  Scotia 
banks  as  I  have  been  able  to  secure  are  also  given. 
They  are  few,  as  there  appears  to  have  been  no  regu 
lar  publication  of  statements  from  the  chartered 
banks  of  Nova  Scotia,  either  in  the  legislative  docu 
ments  or  the  Royal  Gazette  of  that  province. 


214  The  Canadian  Banking  System,  1817-1890 


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Relation  to  Bank  Legislation  of  the  Dominion        215 

IV.  Finally,  the  provinces  of  Quebec  and  Ontario 
were  to  enjoy  in  the  councils  of  the  Dominion  a 
certain  preponderance,  as  well  on  account  of  their 
greater  wealth,  population  and  trade,  as  of  their 
larger  representation  in  Parliament.  Where  the 
precedents  and  laws  of  the  Maritime  Provinces 
differed  from  those  of  the  province  of  Canada,  the 
legislation  of  the  Dominion  was  generally  drawn  up 
according  to  the  Canadian  lines.  Especially  is  the 
effect  of  this  tendency  to  be  remarked  in  the  legis 
lation  with  regard  to  the  banks.  Those  in  Canada, 
both  in  the  aggregate,  and  for  the  most  part  individ 
ually,  were  superior  in  power,  resources  and  influ 
ence,  to  those  of  the  Maritime  Provinces  ;  their 
efforts  to  preserve  the  continuity  of  their  own  devel 
opment  were  destined  to  prevail  over  similar  attempts 
by  weaker  rivals.  It  is  the  more  necessary,  accord 
ingly,  to  know  well  the  charters  granted  in  Canada, 
and  the  forces  there  at  work.  This  study  was  the 
purpose  of  the  chapters  ii  to  v. 

For  the  four  reasons  offered  in  the  preceding 
paragraphs,  a  further  study  of  the  banking  history 
of  the  Maritime  Provinces  need  not  be  undertaken. 
It  cannot  materially  serve  our  present  purpose  of 
tracing  the  development  of  the  banking  system  which 
prevails  in  Canada  to-day. 

NOTE. — THE  TREASURY  NOTES  OF  THE  PROVINCE  OF  NOVA  SCOTIA 

The  Treasury  note  issues  began  in  1812.  The  first  amounted  to 
£12,000  of  notes  bearing  interest  at  6  per  cent.,  receivable  at  the 
Treasury  for  public  dues  and  not  re-issuable.  Warrants  on  the 
Treasury  were  made  payable  in  gold,  silver  or  Treasury  notes,  at  the 
option  of  the  payee.  (52  Geo.  Ill,  cap.  7,  N.  S.)  The  subsequent 
legislation  is  an  example,  in  many  ways,  of  the  course  usually  run 
by  fiduciary  issues  of  governments.  The  ultimate  redemption, 
however,  was  somewhat  more  creditable  than  the  average. 


216  The  Canadian  Banking  System,  1817-1890 

This  issue  of  1812  was  withdrawn  in  1813  and  a  new  issue  autho 
rized  of  £20,000  in  non-interest  bearing  and  re-issuable  notes. 
There  were  provisions  for  funding  the  notes  in  amounts  of  not  less 
than  £100,  by  interest-bearing  certificates,  in  case  the  Treasury  had 
no  gold.  The  notes  issued  under  this  statute  were  not  payable  on 
demand  in  specie  until  three  years  after  the  date  of  publication  of 
the  act.  (53  Geo.  Ill,  cap.  15.)  Thus  in  the  second  year  of  its 
existence  this  government  currency  became  irredeemable  on 
demand. 

In  1817  a  new  issue  of  £50,000  was  authorized,  the  notes  bearing 
date  the  30th  April,  and  being  payable  on  demand  in  gold  or  silver 
after  the  31st  December,  1817.  They  were  non-interest  bearing, 
fundable  quarterly  and  re-issuable  in  like  manner  as  the  preceding 
issue.  (57  Geo.  Ill,  cap.  17.)  £10,000  more  notes  of  denomi 
nations  of  £1,  £2  and  £5  were  authorized  in  1819.  Loan  offices, 
under  the  direction  of  commissioners,  were  established  at  Annapo 
lis,  Halifax  and  Kings,  for  loaning  in  amounts  of  not  more  than 
£200  to  each  borrower,  the  notes  upon  real  estate  security  at  the 
interest  of  6  per  cent.  Repayment  of  one-third  of  the  principal 
was  to  be  exacted  at  the  end  of  three,  six  and  nine  years  after  the 
31st  December,  1819.  Loans  were  made  only  upon  unencumbered 
estates  of  treble  the  value  of  the  sums  secured.  Provision  for 
funding  the  notes  at  6  per  cent.,  after  1822,  and  cancelling  all  thus 
retired,  was  included  in  the  statute.  Notes  unpaid  or  unfunded 
after  the  31st  December,  1820,  were  made  payable  on  demand  in 
gold  and  silver,  and  thereafter  not  re-issuable. 

The  next  year  (1820)  an  issue  of  £20,000  more  was  authorized,  the 
notes  being  payable  the  31st  December,  1822.  At  the  same  time 
the  total  circulation  was  limited  to  £70,000.  (60  Geo.  Ill,  cap.  18.) 
During  the  session  of  1820-21  the  circulation  was  further  limited  to 
£66,227  in  notes  for  five  shillings,  ten  shillings,  £1,  £2  and  £5.  The 
notes  bore  no  interest,  were  to  be  dated  on  the  first  Monday  in 
January  or  July,  according  to  the  half  year  in  which  they  were 
issued,  were  re-issnable,  and  payable  on  demand  in  specie  after  three 
years  from  the  day  of  date.  The  Treasury  being  then  unable  to 
pay  in  gold  and  silver,  was  empowered,  as  usual,  to  fund  the  notes 
with  certificates  at  6  per  cent,  (1  and  2  Geo.  IV,  cap.  4.)  In  1826 
new  commissioners  were  appointed  to  issue  some  £40,000  of  Trea 
sury  notes  and  to  cancel  the  old  ones  in  circulation.  These  were  also 
re-issuable,  receivable  for  public  dues  and  fundable  after  three 
years.  Bat  the  notes  were  now  made  payable  in  payment  of  war 
rants  upon  the  Treasury,  whenever  the  Treasury  should  not  have  the 
needful  gold  and  silver.  The  payee  being  deprived  of  his  election 
between  specie  and  Treasury  notes,  the  notes,  therefore,  became  a 


The  Treasury  Notes  of  Nova  Scotia 

legal  tender  in  discharge  of  government  debts.  (7  Geo.  IV,  cap.  14.) 
Two  years  later  the  Provincial  Treasurer  was  directed  to  apply  what 
gold  and  silver  should  come  into  his  hands  exclusively  to  the  pay 
ment  of  the  funded  debt.  In  1829  the  limit  of  the  circulation  fixed 
at  £10,000  in  the  preceding  year  was  raised  to  £55,000,  and  in  1832 
to  £80,000.  (9  Geo.  IV,  cap.  3;  10  Geo.  IV,  cap.  43;  2  Wm.  IV, 
cap.  64.) 

The  next  year  the  defective  state  of  the  currency  and  the  desire 
to  provide  for  its  specie  redemption  led  the  legislature  to  enact  that 
the  payment  of  customs  duties  should  be  in  gold  and  silver  alone. 
The  Treasurer  was  instructed,  whenever  he  had  the  specie,  to  pay 
Treasury  notes  in  sums  of  £10,  upon  presentation;  when  notes  in 
sums  of  £100  or  over  were  presented  for  payment,  and  sufficient 
gold  or  silver  was  lacking,  the  holder  was  entitled  to  receive  inter 
est-bearing  certificates  for  like  amounts.  When  the  Treasurer 
lacked  both  specie  and  notes,  the  commissioners  provided  for  the 
payment  of  government  dues,  certificates  of  funded  debt  which 
bore  interest  at  4  per  cent.,  and  were  limited  to  an  outstanding 
total  of  £20,000.  The  commissioners  might  issue  new  notes  for 
amounts  equal  to  those  retired  by  certificates,  and  these  new  notes 
were  payable  in  discharge  of  warrants  upon  the  Treasury.  (3  Wm. 
IV,  cap.  38.) 

According  to  an  act  of  1834  the  notes  were  received  for  customs 
duties  at  the  rate  of  16s.  cy.  per  £  stg.  (4  Wm.  IV,  cap.  1.)  In 
1835  the  interest  on  certificates  by  which  the  notes  were  funded  was 
reduced  by  statute  from  6  to  5  per  cent.,  while  the  interest  on 
£11,500  of  the  certificates  of  funded  debt,  issued  under  the  act  of 
1833,  was  raised  to  5  per  cent.  The  legislature  further  provided  for 
funding  the  notes,  prohibited  the  re-issue  of  notes  funded,  and 
limited  the  amount  of  certificates  issued  under  the  act  and  out 
standing  to  £18,500,  while  pledging  the  payment  of  the  whole  sum 
by  the  1st  January,  1838,  or  as  soon  as  possible  thereafter.  (5  Wm.  IV, 
cap.  22.)  The  province  was  still  liable  in  1846  for  some  £30,000  upon 
certificates,  a  large  amount  of  Treasury  notes  was^  outstanding,  and 
the  government  owed  £27,000  to  the  Savings  Bank  at  Halifax.  The 
former  laws  relating  to  Treasury  notes  were  repealed,  and  the  sub 
stitution  of  a  new  issue  for  the  notes  in  circulation  authorized.  But 
according  to  the  new  statute  the  notes  were  still  payable  to  holders 
of  warrants  upon  the  Treasury,  if  there  should  be  no  gold  or  silver 
available.  They  might  be  re-issued.  The  amount  in  circulation 
was  limited  to  its  then  figure.  Notes  were  receivable  at  the  Treasury 
and  by  collectors  of  imposts  and  light  duties  at  their  par  value. 
Customs  duties  were  payable  in  gold,  silver  and  Treasury  notes 
only.  (9  Vic.,  cap.  14.)  This,  apparently,  was  discrimination 


218  The  Canadian  Banking  System,  1817-1890 

against  bank  notes.  The  banks,  indeed,  already  suffered  somewhat 
by  the  partiality  of  the  legislature  for  Treasury  notes,  for  they  were 
prohibited  by  an  act  of  1834  (4'Wm.  IV,  cap.  24),  from  issuing  notes 
for  less  than  £5  currency. 

Under  the  law  of  1846,  notes  were  issued  down  to  the  time  of 
Confederation.  Assistance  granted  to  railways  in  1854  was  the  ex 
cuse  for  an  addition  of  £50,000  in  notes  of  20  shillings  to  the  £100, 
000  currency,  or  thereabouts,  already  in  circulation.  (17  Vic.,  cap.  3.) 
These,  like  the  issue  of  1846,  were  nominally  payable  on  demand  in 
gold  or  silver.  The  form  of  the  note  was  as  follows: 

One  r-  One 

Pound.  Pound. 

Province  of  Nova  Scotia — The  bearer  hereof  is   entitled  to  re 
ceive  at  the  Treasury,  Twenty  Shillings. 

Dated  at  Halifax  the day  of 18 

I  Commissioners.         . . . . : Treasurer. 

But  practically  the  Treasury  Notes  of  Nova  Scotia  were  irredeemable; 
large  sums  could  not  be  converted  into  specie  at  the  option  of  the 
holder;  nor  could  they,  for  example,  be  safely  used  by  the  banks 
as  a  part  of  their  reserves.1  The  only  transactions  in  which,  so 
far  as  I  can  discover,  they  were  legal  tender,  were  in  payment  of 
warrants  upon  the  Treasury,  when  there  was  insufficient  gold  or  sil 
ver  to  meet  the  debts  of  the  government.  A  qualified  redemption 
was  kept  up  by  the  possibility  of  using  the  notes  at  their  par  value 
in  payment  to  the  government;  but  this  did  not  suffice  at  all  times 
to  prevent  a  depreciation.  The  indebtedness  of  the  province  upon 
this  paper  was  assumed  by  the  Dominion  of  Canada  in  1867.  The 
amount  was  then  $605,859.12.  Redemption  was  so  rapid  during  the 
next  five  years  that  by  1872  only  $61,685  were  still  outstanding,  and 
by  1890,  $39,743.  (Public  Accounts,  Canada,  1890,  p.  38.) 

1  Journal  of  the  House  of  Commons,  Canada,  1869,  Appendix  T,  p.  46,  Evidence 
of  Messrs.  Lewin  and  Rowley. 


CHAPTER  VII 
BANKING  REFORMS,  1867-1871 

§  36. — PRELIMINARY  MEASURES 

BY  the  British  North  America  Act  of  1867,  the 
Parliament  of  Canada  was  given  exclusive  legislative 
authority  in  all  matters  coming  within  the  subjects 
of  currency  and  coinage,  banking,  incorporation  of 
banks  arid  the  issue  of  paper  money,  savings  banks, 
bills  of  exchange  and  promissory  notes,  interest  and 
legal  tender.1 

"An  Act  respecting  Banks"  (31  Vic.,  cap.  2)  was 
the  earliest  statute  enacted  under  these  powers  which 
concerns  the  present  study.  This  was  merely  a 
temporary  measure,  the  expiry  of  which  was  fixed 
for  the  end  of  the  first  session  of  Parliament,  after 
the  1st  January,  1870.  Yet  some  interest  attaches 
to  it  as  an  early  indication  of  the  force  with  which 
Canadian  precedents  influenced  the  legislators  of  the 
Dominion.  It  first  extended  the  powers  of  banks 
previously  incorporated  by  any  of  the  provinces  to 
the  territory  of  the  whole  Dominion.  Banks  in  Nova 
Scotia  and  New  Brunswick  were  subjected  to  the  tax 
of  one  per  cent,  upon  the  excess  of  their  average 
circulation,  above  the  average  weekly  amount  of 
coin  and  bullion  kept  in  their  vaults,  and  reported, 
with  other  items,  semi-annually  to  the  Dominion 

imperial  Statutes,  30  and  31  Vic.,  cap.  33,  §91,  clauses  14  to  16,  18 
to  20  inclusive. 


220  The  Canadian  Banking  System,  1817-1890 

government.  The  remainder  of  the  law  is  practi 
cally  a  re-enactment  for  the  Dominion  of  Canada  of 
the  general  legislation  upon  banks  previously  in  force 
in  the  province  of  the  same  name.  Banks  were 
empowered  to  hold  and  dispose  of  mortgages  taken 
as  additional  security  for  debts  transacted  in  the 
usual  course  of  their  business,  to  purchase  and  hold 
lands  thus  mortgaged  to  them,  to  bid  in  lands  as 
auctioned  at  their  suit,  acquire  absolute  title  therein, 
to  act  on  power  of  sale,  etc.,  etc. 

The  Dominion  Parliament  also  adopted  the  law  as 
to  loans  on  warehouse  receipts,  described  in  the  last 
chapter  but  one.  The  period  for  which  the  banks 
might  hold  the  commodities  described  by  the  instru 
ment  was  limited  to  six  months,  except  in  the  case 
of  timber,  when  a  twelve  months'  holding  was 
allowed.  Section  9  of  the  act  provided  for  the  case 
where  the  warehouseman  and  the  borrower  were  one 
and  the  same  person;  section  10  declared  that  ad 
vances  granted  by  banks  upon  the  security  of  ware 
house  receipts,  bills  of  lading,  specifications  of 
timber,  and  the  like  should  have  priority  over  claims 
of  the  unpaid  vendors.  Both  these  features  had 
been  added  to  the  province  of  Canada  statute  in 
1861,  the  first  because  the  courts  had  decided  that 
the  warehouseman,  etc.,  must  be  the  bailee  and  not 
the  owner  of  the  goods;  the  second,  in  order  to  make 
the  law  certain,  as  the  unpaid  vendor  previously  had 
the  prior  lien  in  some  cases.1  All  banks  were  ex 
empted  from  penalties  for  usury,  but  were  not  per- 

xThe  whole  development  is  fully  treated  by  Z.  A.  Lash,  ''Ware 
house  Receipts,  Bills  of  Lading  and  Securities,  under  Sec.  74  of  the 
Bank  Act,"  Journal  of  the  Canadian  Bankers'  Association,  vol.  ii,  p. 
54.  The  work  first  came  to  my  notice  after  this  and  the  subsequent 
references  were  written. 


Preliminary  Measures  221 

mitted  to  recover  at  law  any  higher  rate  than  7  per 
cent.  Graduated  charges  for  the  expenses  of  agency 
and  collection,  not  to  exceed  one-half  per  cent,  for 
ninety-day  paper,  were  permitted  to  banks  discount 
ing  notes  payable  at  some  office  of  their  own,  other 
than  the  place  of  discount.  The  usual  charge  of 
one-half  per  cent,  in  addition  to  the  regular  rate  of 
discount,  was  permitted  when  the  note  should  be 
payable  at  any  other  place  and  not  at  a  branch  of  the 
same  bank. 

A  second  re-enactment  of  Canadian  legislation 
occurred  in  1868:  "  An  Act  to  enable  Banks 
in  any  part  of  Canada  to  issue  notes  of  the 
Dominion  instead  of  issuing  notes  of  their  own." 
(31  Vic.,  cap.  46.)  It  was  the  Provincial  Note 
Act  of  1866,  phrased  in  the  same  general  terms, 
extending  the  same  general  offers.  But  aside  from 
its  fiscal  object,  it  was  manifestly  intended  merely 
to  continue  the  arrangements  with  the  single  bank 
which  already  had  charge  of  the  government  issue 
under  such  an  agreement  that,  even  had  they  wished, 
it  would  have  been  impossible  for  other  banks  to 
take  advantage  of  the  government's  ostensible  offer.1 
The  eight  millions  of  province  of  Canada  notes  pre 
pared  in  1866,  and  the  five  millions  thereof  in  cir 
culation  in  1868,  were  declared  to  be  Dominion  notes, 
for  which  the  Dominion  alone  should  be  responsible. 
It  was  also  provided  that  the  Governor  might,  in  his 
discretion,  establish  branches  of  the  Receiver  Gen 
eral's  department  in  Montreal,  Toronto,  Halifax  and 

1  Journal  of  the  House  of  Commons,  Canada,  1870,  Appendix  2,  p. 
5.  A  letter  of  Sir  Francis  Hincks,  Minister  of  Finance,  to  R.  B. 
Angus,  Esq.,  General  Manager  of  the  Bank  of  Montreal,  14th  Feb 
ruary,  1870. 


222  The  Canadian  Banking  System,  1817-1890 

St.  John  for  the  issue  and  redemption  of  Dominion 
notes,  or  might  make  arrangements  therefor  with 
any  chartered  bank  or  banks,  and  allow  for  such  ser 
vices  a  commission  of  not  more  than  one-quarter  of 
one  per  cent,  for  every  three  months  upon  the  average 
amount  of  notes  in  circulation  during  that  period. 
Owing  to  the  difference  of  currencies,  notes  made 
payable  in  Halifax  were  legal  tender  in  Nova  Scotia 
only,  and  at  the  rate  of  $5  per  pound  sterling. 

In  1869  their  charters  being  about  to  expire,  the 
Parliament  continued  till  the  end  of  the  first  session 
of  Parliament,  after  the  1st  January,  1870,  the  cor 
porate  existence  of  the  Quebec  Bank,  City  Bank, 
Banque  du  Peuple,  Bank  of  Toronto,  Ontario  Bank, 
Bank  of  Brantford,  Canadian  Bank  of  Commerce, 
Royal  Canadian  Bank,  La  Banque  Nationale,  the 
Gore  Bank  and  Niagara  District  Bank. 


§37. THE    QUESTION    OF    BANKING    REFORM 

By  the  measures  of  1867-69,  time  was  gained  to 
consider  the  great  problem  of  assimilating  the  cur 
rency  and  banking  systems  of  the  several  provinces, 
and  of  creating  out  of  the  diversity  one  general, 
uniform  system  for  the  whole  country.  Upon  the 
day  that  Confederation  became  a  fact,  there  were 
eighteen  banks  carrying  on  business  in  Ontario  and 
Quebec,  under  charters  granted  by  the  province  of 
Canada,  five  working  under  Nova  Scotia  charters, 
and  four  under  acts  passed  by  New  Brunswick.1 
The  Bank  of  British  North  America,  acting  under 
its  royal  charter,  operated  in  all  the  provinces,  but 
it  also  was  to  be  subject  to  such  Dominion  legislation 
:See  Note  1,  next  page. 


The  Question  of  Banking  Reform  223 

as  did  not  interfere  with  the  single  liability  of  its 
shareholders,  and  a  few  other  peculiar  features  of 
its  constitution.  Of  charters  granted,  not  yet  for 
feited  for  non-user,  and  still  available  for  future 
operations,  there  were  in  Canada  three,  in  Nova 
Scotia  two,  in  New  Brunswick  five.2  If  the  inter- 

1  ONTARIO  AND  QUEBEC  Capital  Paid-up 

Bank  of  Montreal $6,000,000 

Quebec  Bank 1,476,250 

Commercial  Bank  of  Canada 4,000,000 

City  Bank 1,200,000 

Gore  Bank 809,280 

Bank  of  British  North  America 4,866,666 

Banque  du  Peuple 1,600^000 

Niagara  District  Bank 279,376 

jMolsons'  Bank 1,000,000 

Bank  of  Toronto 800,000 

Ontario  Bank 1,999,100 

Eastern  Townships  Bank 375,386 

Banque  Nationaie 1,000,000 

Banque  Jacques  Cartier 953,135 

Merchants'  Bank  of  Canada 941,182 

Royal  Canadian  Bank 806,626 

Union  Bank  of  Lower  Canada 748,865 

Mechanics'  Bank 227,725 

Bank  of  Commerce 384,181 

$29,467,773 
NOVA  SCOTIA 

Bank  of  Yarmouth $128,600 

Merchants'  Bank 64,000 

People's  Bank 399,789 

Union  Bank 400,000 

Bank  of  Nova  Scotia 560,000 

$1,552,389 
NEW  BRUNSWICK 

Bank  of  New  Brunswick $600,000 

Commercial  Bank  of  New  Brunswick 600,000 

St.  Stephen's  Bank 200,000 

People's  Bank 80,000 


$1,480,000 

2These  were,  in  Canada,  the  chaiters  of  the  Bank  of  Northum 
berland,  the  Bank   of   London  and  the  Bank   of  Sicmoe;  in  Nova 


224:          The  Canadian  Banking  System,  1817-1890 

ested  banks  were  to  continue  their  business,  the  re 
newal  of  seventeen  of  these  charters  would  become 
necessary  before  the  1st  July,  1871. 

But  the  problem  confronting  Parliament,  and  inter 
esting  people,  was  more  than  the  renewal  of  certain 
bank  charters.  In  the  case  of  new  banks,  it  was 
more  than  the  passing  of  certain  private  acts,  framed 
on  the  lines  which  hitherto  had  been  followed  in  the 
several  provinces.  It  was  more,  indeed,  than  the 
amendment  of  charters  in  such  manner  and  details 
as  experience  might  have  suggested.  The  creation 
of  the  Confederation  and  the  establishment  of  a 
united  Parliament  marked  the  close  of  one  period  of 
Canadian  history.  Acts  and  decisions  immediately 
subsequent,  and  the  earlier  legislation  passed  by 
authority  of  the  British  North  America  Act,  became, 
to  a  great  extent,  precedents  for  guidance  of  the 
future.  No  stronger  example  could  be  adduced  than 
the  statutes  with  respect  to  banks.  The  question, 
therefore,  as  it  appeared  to  the  first  Parliament  of 
the  Dominion,  was  serious,  difficult,  momentous. 
Upon  their  decision  depended  not  only  the  temporary 
continuance  of  the  banks,  and  the  security  of  the 
public's  claims,  but  also  the  permanent  efficiency  of 
the  system,  the  later  policy  of  the  government  and 
the  future  development  of  bank  legislation. 

The  discussion  by  people  and  press  had  been  stimu 
lated  by  the  failure  of  the  great  Commercial  Bank, 
and  the  financial  crisis  that  followed  in  October,  1867. 
We  are  already  familiar  with  the  result  of  the  meet- 
Scotia,  the  Commercial  Bank  of  Windsor  and  the  Exchange  Bank 
of  Yarmouth;  in  New  Brunswick,  the  Albert  Bank,  the  Woodstock 
Bank,  the  Merchants'  Bank  of  New  Brunswick,  the  Northern  Bank 
and  the  Eastern  Bank  of  New  Brunswick.  Vide  supra,  chapters  v 
and  vi. 


The  Question  of  Banking  Reform    '  225 

ing  of  the  representatives  from  the  various  banks 
held  upon  the  21st  of  that  month,  with  the  hope  of 
arranging  for  some  plan  to  assist  the  Commercial 
Bank  and  prevent  its  failure.  The  official  account  of 
this  meeting  was  published  upon  the  28th.1  But  it 
did  not  disarm  popular  and  newspaper  criticism  of 
the  Government's  fiscal  policy.  The  Hon.  A.  T.  Gait, 
Minister  of  Finance  for  the  Dominion,  became  con 
vinced  that  public  opinion  in  Ontario  to  some  extent 
held  him  responsible  for  the  loss  which  had  been 
suffered  by  investors  in  the  Commercial  Bank;  he 
felt  that  his  usefulness  was  marred,  and  that  he  could 
not  expect  the  same  support  from  representatives  of 
Ontario  that  he  had  been  previously  accorded.2  On 
the  7th  November,  1867,  he  resigned  his  seat  in  the 
Privy  Council. 

On  the  15th  November  appeared  explanations  which 
the  Board  of  the  Bank  of  Montreal  had  embodied  in 
resolutions  adopted  the  4th.3  The  directors,  appa 
rently,  had  felt  constrained  to  publish  them  with  some 
hope  of  mollifying  the  hostility  to  their  bank,  which 
the  events  of  the  autumn  had  only  served  to  increase 
among  the  people  of  Ontario.  The  original  cause  of 
the  unpopularity,  no  doubt,  was  the  restrictive  policy 
followed  in  Canada  West  after  1862-3,  at  the  instance 

irroronto  Globe,  28th  October,  1867. 

2Ottawa  Times,  8th  November,  1867. 

3Most  of  these  explanations,  to  be  sure,  were  denied  by  the 
president  of  the  City  Bank,  Mr.  William  Workman/in  a  letter  pub 
lished  in  the  Toronto  Globe  of  the  14th  November,  just  as  the  min 
isterial  explanations  were  criticised  and  riddled  on  their  appear 
ance.  The  sources  for  an  account  of  the  commercial  failure  and  the 
action  of  the  banks  and  the  government  in  regard  to  it,  are  more 
contradictory  than  the  evidence  in  a  case  at  admiralty  law.  Their 
further  consideration  would  be  interesting,  doubtless,  but  not  par 
ticularly  advantageous. 
15 


226  The  Canadian  Banking  System,  1817-1890 

of  the  extraordinarily  able  man  then  at  the  head  of 
the  bank,  Mr.  E.  H.  King.  The  western  business 
was  regarded  as  thoroughly  unsound,  being  based  on 
accommodation  paper.  Mr.  King  had  no  reverence 
for  "names"  upon  securities  offered  for  discount;  he 
resolved  to  bring  the  business  down  to  a  solid  basis. 
And  so  he  did,  although  at  the  cost  of  more  than  a 
million  dollars,  written  off  between  1868  and  1866, 
by  the  Bank  of  Montreal  on  account  of  bad  and  doubt 
ful  debts  in  Upper  Canada.  Canada  West  also  suf 
fered  by  the  process,  and  much  of  its  loanable  capi 
tal,  accumulated  as  deposits  in  the  Bank  of  Montreal, 
was  drained  away  from  the  producers  of  the  province, 
either  to  supply  the  importing  merchants  of  Montreal, 
or  to  be  sent  to  New  York,  there  to  serve  the  bank's 
exchange  and  gold  speculations  in  Wall  Street.1 

In  spite  of  these  facts,  the  influence  and  power  of 
the  bank  were  relatively  enormous.  Two  of  its  great 
competitors,  the  Commercial  Bank  and  the  Bank  of 
Upper  Canada,  had  fallen  victims  to  the  stress  of 
events  and  their  own  mismanagement.  The  Bank  of 
Montreal  had  nearly  a  fourth  of  the  total  paid-up 
banking  capital  in  Ontario  and  Quebec;  its  assets 
were  19/72  of  a  like  total,  over  a  fourth;  and  its  lia 
bilities  by  circulation,  deposits,  etc.,  were  nearly  a 
third  of  the  $39,000,000  owed  by  all  the  banks.  By 
adding  to  these  the  facts  that  the  bank  was  the  gov 
ernment's  depositary  and  fiscal  agent,  and  that  it  en 
joyed  peculiar  advantages  as  the  sole  issuer  of  pro 
vincial  notes,  one  has  ample  explanation  of  the  re 
markable  prestige  enjoyed  by  the  Bank  of  Montreal 
and  its  leading  officers. 

1  The  Shareholder,  Montreal,  5th  September,  1890,  Reprint  of  the 
article  on  the  Bank  of  Montreal,  Toronto  Globe,  15th  November, 
1867. 


The  Question  of  Banking  Reform,  227 

Now,  at  the  same  meeting  of  the  4th  November, 
the  board  had  approved  a  memorandum  of  a  proposed 
system  of  banking  submitted  by  the  General  Mana 
ger,  E.  H.  King.     "The  General  Manager,"  it  ran, 
"believes  that  the  interests  of  the   country  will  be 
best  served  by  the  diffusion  of  banking  interests  in 
different  localities,  leaving  to  the  greater  banks,  in 
large  measure,  the  care  of  the  mercantile  and  foreign 
trade  of  the  country,  and  to  the  lesser  in  their  own 
districts  the  care  and  support  of  local  enterprise.     He 
sees  no  reason  why  there  should  not  be  perfect  free 
dom  and  equality  in  banking,  and  why  the  greater 
and  smaller  banks  could  not  exist  in  harmony,  each 
within   its  own   sphere   contributing  to   the  general 
prosperity."1     The    suggestion    of    "free    banking," 
given  in  these  words,  becomes  unmlstakeable  as  the 
scheme  is  unfolded.     It  was  to  extend  the  govern 
ment's  issues;  to  deprive  the  banks  of  their  powers 
of  circulation;  to  allow  only  the  issue  of  notes  pre 
pared  by  government,   and  delivered  to  banks  only 
after  the  deposit  of  Dominion  government  bonds,  to 
be  held  as  special  security  for  the  circulation;  to  per 
mit  the  establishment  of  local  banks  with  small  capi 
tal  in  each  county;  and  to  provide  for  elasticity  of 
the  currency,  by  means  of  maximum  deposits  of  bonds 
as  note  security,  and  by  the  periodical  movement  of 
currency  from  east  to  west,  as  in  the  United  States. 
The  author  of  this  scheme  was  not  the  only  Cana 
dian  to  be  won  over  to  the  National  Banking  System. 
To   bring   1,600   banks  and  §420,000,000  of  banking 
capital  under  uniform  legislation  and  to  achieve  the 
reforms  which  the  founders  of  the  national  system 
could  justly  claim,  had  been  no  mean  task.     So  far, 
1  Toronto  Globe,  15th  November,  1867. 


228  The  Canadian  Banking  System,  1817-1890 

moreover,  the  system  had  worked  well.  There  was 
a  decided  attraction  in  the  much  vaunted  security  of 
the  national  bank  note,  an  attraction  that  often 
overshadowed  the  rigidity  of  such  a  circulation,  and 
the  lack  of  any  daily  test  of  convertibility.  Then  the 
pleasant  notion  that  a  local  bank,  founded  on  local 
capital,  and  managed  by  local  magnates,  is  best  able 
to  assist  the  local  interests,  had  often  appeared  in 
Canada  as  an  argument  for  increasing  the  number  of 
banks,  and  received  frequent  acceptance,  particularly 
among  the  more  needy  borrowing  classes.  Further 
more,  the  national  banking  law  had  created  a  mar 
ket  for  nearly  $340,000,000  of  United  States  bonds. 
Free  banking  was  believed  to  have  increased,  in  New 
York,  the  demand  for  the  state's  securities,  and  thus 
to  have  raised  the  price.  Canadian  leaders  were 
anxious  in  every  possible  way  to  strengthen  the  credit 
of  the  new  government,  and  they  were  inclined  to 
favor  any  practicable  plan  for  the  creation  of  new 
financial  resources. 

The  Select  Committee  of  the  Senate  struck  in  the 
session  of  1867-68,  roundly  condemned  in  their  report 
the  bank  of  issue  system,  started  under  Mr.  Gait, 
and  recommended  the  return  to  the  system  of  bank 
ing  that  obtained  previous  to  1866.  Whether  they 
were  influenced  by  the  scheme  of  Mr.  King,  or  con 
verted  by  the  American  experience,  it  is  needless 
now  to  enquire;  as  a  pis  alter,  however,  they  did 
approve  of  the  American  plan.  It  will  be  best  to 
quote  literally  the  statement  of  their  position:  "Your 
Committee  recommend  that  if  the  financial  require 
ments  of  the  Dominion  should  induce  the  Govern 
ment  to  desire  the  introduction  of  a  new  system, 
including  the  taking  possession  of  the  currency  of 


The  Question  of  Banking  Reform  229 

the  country  (which  your  Committee  would  strongly 
deprecate),  the  issue  of  a  paper  currency  be  based 
upon  the  deposit  with  the  Government  of  the  public 
securities  of  the  Dominion  under  a  system  analo 
gous  to  the  National  Banking  System  of  the  United 
States,  but  redeemable  on  demand,  the  Government 
regulating  the  issue  under  the  authority  of  Parlia 
ment;  the  banks  through  which  the  notes  are  issued 
being  responsible  for  their  instant  redemption."1 

On  the  14th  April,  1868,  the  Hon.  John  Rose,  suc 
cessor  to  Mr.  Gait  as  Minister  of  Finance,  proposed 
to  the  House  of  Commons  the  appointment  of  a  select 
committee  upon  Banking  and  Currency.  It  would  be 
the  duty  of  the  committee,  he  said,  to  inquire  into 
the  position  and  circumstances  of  all  the  banks  in  the 
Dominion.  Mr.  Rose  himself  anticipated  that  the 
House  would  agree  upon  at  least  two  great  funda 
mental  principles,  viz.,  that  the  amplest  security 
should  be  given,  not  only  for  the  circulating  medium 
in  common  use,  but  also  for  the  deposits  confided  for 
safe  keeping.  He  proceeded  then  to  review  the 
charters  in  force  in  the  different  provinces,  and  the 
questions  growing  out  of  them.  In  neither  part  was 
his  speech  distinguished  for  accuracy  as  to  facts 
or  correctness  in  theory.  But  his  committee  was 
struck,  and  the  Minister  appointed  chairman.  The 
committee  then  drew  up  questions  covering  subjects 
as  follows:  the  past  services  of  the  existing  banking 
system;  expediency  of  issuing  government  paper; 
practicability  and  advantage  of  introducing  a  system 
of  banks  issuing  currency  based  on  deposits  of  gov 
ernment  securities  analogous  to  the  American  sys 
tem;  the  practice  and  business  of  the  Canadian  banks; 
'Journal  of  the  Senate,  Canada,  1867-68,  Appendix  I. 


230          The  Canadian  Banking  System,  1817-1890 

the  defects  of  the  Canadian  system,  and  the  means 
of  improvement.  Among  others  eleven  high  bank 
officials,  including  one  president  and  ten  cashiers, 
three  eminent  public  men,  three  boards  of  trade  and 
five  capitalists  and  leading  business  men  replied  to 
the  questions  submitted  by  the  committee.  The  tes 
timony  was  by  no  means  unanimous,  but  the  weight 
of  it  was  no  wise  in  favor  of  the  system  of  specially 
secured  bank  issues,  for  the  introduction  of  which 
events  proved  the  committee  to  have  been  barely 
more  than  a  cloak. 

We  need  no  more  than  mention  the  faults  they 
found  with  the  plan  of  government  issues  suggested 
by  the  questions:  the  temptation  to  extravagant  ex 
penditure  arising  from  such  sudden  and  easy  sources 
of  financial  aid;  the  principle  that  the  government 
should  borrow  in  the  open  market  at  fixed  times  of 
maturity,  for  which  provision  could  be  made  with 
out  disturbance;  the  fact  that  every  existing  gov 
ernment  currency  was  then  at  a  discount;  the 
absence  of  any  sympathy  between  the  demand  for 
currency  and  a  bureaucratic  source  of  supply,  gov 
ernment  issues  being  ordinarily  emitted  in  payment 
for  public  works,  or,  perhaps,  the  current  expenses 
of  the  state,  rather  than  in  provision  for  exchanges 
about  to  occur;  the  fact  that  government  issues  are 
not  subjected  to  the  regular  redemption  made  neces 
sary  for  bank  notes  by  the  daily  repayment  of 
loans,  the  accumulation  of  deposits,  and  the  compe 
tition  of  the  issuers;  that  the  convertibility  of  the 
government  issue  is  protected  by  no  regular  replen 
ishment  of  the  reserves  or  constant  liquefaction  of 
the  assets  of  the  issuer,  as  in  the  case  of  bank  notes; 
and  that,  finally,  to  abolish  the  bank  circulation 
would  lead  to  a  great  contraction  of  discounts. 


The  Case  against  Circulation  Secured  ~by  Bonds       231 

§38. THE  CASE  AGAINST  BANK  CIRCULATION  SECURED 

BY  PLEDGE  OF  BONDS 

In  their  criticism  of  existing  charters,  the  bankers 
were  even  more  explicit  and  full  than  when  testify 
ing  to  the  Senate  Committee  of  the  previous  session, 
but  this  was  constructive  criticism,  to  follow  which 
would  have  been  to  better  Canadian  banking  law.1 
Against  the  implied  proposals  of  the  committee,  on 
the  other  hand,  they  objected  that  the  system  of 
banking  and  currency  there  suggested  was  costly, 
rigid,  comparatively  inefficient  and  calculated  to 
diminish  rather  than  increase  the  loanable  funds 
ordinarily  at  the  disposal  of  the  commerce  and  indus 
try  of  the  country.  The  question  now  was  not  one 
of  bank  extension,  and  the  creation  of  local  facilities, 
nor  did  it  turn  particularly  upon  the  functions  and 
prerogatives  of  government.  So  it  was  necessary  to 
urge  the  more  strictly  economic  objections  against 
"  free  banking,"  and  that  possibility  of  a  further 
increase  of  government  paper  which  the  questions 
also  implied. 

As  an  economic  question  it  was  of  the  highest 
significance.  In  their  business  of  issuing  notes, 

:The  following  are  the  chief  improvements  suggested  by  the 
bankers,  the  list  being  compiled,  for  the  most  part,  from  the  replies 
of  Messrs.  Cartwright,  Hague,  Lewin  and  Stevenson;  the  replies  of 
any  one  witness,  of  course,  never  comprising  the  whole  list. 

(a)  To  establish  a  minimum  capital  to  be  required  from  newly 
chartered  banks,  and  to  limit  the  number  of  branches  in  proportion 
to  the  paid-up  capital  stock. 

(6)  To  prevent  the  beginning  of  business  until  a  certain  part  of 
the  capital  stock  is  paid  up,  held  in  specie,  and  the  fact  certified  to 
by  a  government  officer. 

(c)  To  make  the  double  liability  available  in  case  of  need  within 
a  reasonable  period,  e.  g.,  by  assessment  of  shareholders  for  the 
deficiency  at  the  end  of  say  six  months  after  suspension,  and  by 


The  Canadian  Banking  System,  1817-1890 

receiving  and  employing  the  spare  funds  of  the 
people,  discounting  commercial  paper  and  bills  of 
exchange,  and  making  miscellaneous  advances,  the 
banks  were  in  close  relations  with  nearly  all  classes 
of  the  producing,  trading  and  lending  communities 
which  then  made  up  Canada.  The  loanable  funds 
of  the  banks  were  derived  from  their  capital,  deposits 
and  circulation.  To  force  the  banks  to  furnish  bond 
security  for  the  notes  previously  issued  upon  their 
general  credit,  would  be  to  close  one  of  the  sources 
of  supply,  and  by  consequence  to  diminish  the  amount 
of  capital  employed  in  furthering  commercial  enter 
prise.  For  in  order  to  get  the  bonds,  value  of  some 
sort  must  be  given — and  the  portion  available  for 
loans,  either  of  capital  or  deposits,  would  inevitably 
be  lessened,  even  though  circulation  remained  at  the 
same  height.  Bank  profits,  probably,  after  paying 

provision  that  the  subsequent  proceeds  form  the  dividend  of  the 
shareholders,  rather  than  the  creditors. 

(d)  To  make  transfers  within  three  months  of  the  suspension, 
and  at  any  time  thereafter,  void. 

(e)  To  require  such  statements  of  accounts  as  would  check  ille 
gitimate  operations. 

(/)  To  prohibit  any  but  moderate  dividends  till  a  reserve  fund 
should  be  accumulated,  such  to  be  made  good  if  impaired. 

(g)  To  make  the  circulation  a  first  charge  upon  the  assets  of  an 
insolvent  bank. 

(h)  To  prohibit  the  issue  of  notes  for  less  than  four  dollars. 

(i)  To  require  a  certain  proportion  of  demand  liabilities  to  be  held 
in  specie,  say  20  per  cent. 

(j )  To  limit  the  circulation  to  paid-up  capital  stock  and  govern 
ment  securities,  and  provide  that  any  excess  should  be  covered  by 
specie  in  hand  over  and  above  the  amount  required  to  fulfill  the 
previous  recommendations. 

(&)  To  require  each  half  year  the  publication  of  a  certified  list  of 
the  shareholders. 

(I)  To  prohibit  the  reduction  of  capital  stock,  and  to  compel  the 
stockholders  to  make  good  the  capital  if  it  should  be  impaired. 
Vide  Journal  of  the  House  of  Commons,  Canada,  1869,  Appendix  I. 


The  Case  against  Circulation  Secured  ~by  Bonds       233 

the  first  cost  of  adjustment  to  the  new  conditions, 
would  not  materially  suffer.  The  rate  of  discount 
would  rise  sufficiently  to  recoup  the  loss  of  working 
in  less  favorable  circumstances.  But  the  financial 
interests  of  the  country,  the  shipping  and  the  rail 
ways,  the  commerce,  domestic  and  foreign,  the 
industries  of  the  farms,  factories,  fisheries,  forests 
and  mines,  were  too  closely  and  strongly  connected 
with  the  banks,  too  dependent  upon  them,  to  be 
unaffected  by  the  conversion  of  eight  to  ten  millions 
of  dollars  of  active  banking  capital  into  government 
debt. 

So  far  as  men  could  foresee,  the  change  was  alto 
gether  likely  to  produce  a  commercial  stringency, 
and  the  mercantile  failures  that  follow  a  great  and 
swift  contraction  of  credit.  A  complete  recovery 
would  scarcely  be  possible.  From  the  trade  and  the 
development  of  the  country  there  would  have  been 
withdrawn  a  part  of  the  accustomed  measure  of  bank 
accommodation.  Should  the  c'hange  be  gradual,  a 
positive  diminution  of  banking  funds  might  not 
occur;  e.  g.,  should  the  completion  of  the  change  be 
delayed  till  capital  stock  plus  deposits  should  equal 
the  total  (in  1868)  of  capital  stock  plus  deposits  plus 
circulation.  The  pressure  in  this  case  wrould  be  more 
slowly  applied,  and  never  so  great  at  a  given  instance; 
but  during  the  period  of  transition,  the  business  of 
the  country  would  be  deprived  of  all  benefits  from 
that  increase  of  accumulation  which  is  a  feature  of 
any  progressive  national  economy.  Increasing  bank 
capital  during  such  a  period  would  not  make  up  the 
deficiency.  The  moneys  available  for  the  purpose, 
it  was  argued,  were  already  held  by  the  banks  as 


C'A         oar 

VV->9      *•     fc^ 


d&FOB,*^ 


234  The  Canadian  Banking  System,  1817-1890 

deposits.  To  take  from  deposits  to  add  to  capital 
stock  would  hardly  improve  the  financial  situation.1 

Under  the  system  of  issue  against  special  security, 
less  attention  is  apt  to  be  paid  to  the  safeguard  of 
requiring  a  large  paid-up  capital  from  each  bank 
within  the  legislature's  jurisdiction.  The  tendency 
is  to  permit  the  establishment  of  small  companies, 
who  often  lack  the  means  to  extend  their  business 
beyond  the  locality  of  their  principal  office,  and  fre 
quently  have  no  wish  to  do  so.  By  the  original  free 
banking  legislation,  branches  were  forbidden.  Less 
stable,  more  dependent  upon  the  prosperity  of  the 
single  district  whence  comes  their  support,  less  ably 
managed,  because  the  salaries  paid  by  a  great  bank 
would  be  ruinous  to  a  small  one,  the  little  local  banks 
are  more  likely  to  suspend  their  payments,  and  more 
likely  to  become  insolvent  in  times  of  difficulty  than 
larger,  stronger  institutions.  Americans  need  but 
recall  the  crisis  of  1893  to  find  the  statements  of  the 
Canadian  bankers  confirmed.  The  risk  from  loose 
banking  is  merely  shifted  from  note  holders  to  the 
depositors  and  other  creditors;  it  is  not  avoided. 
Then,  too,  the  Canadian  government  would  be  liable 
under  the  proposed  system  to  redeem  the  notes  of 
failed  banks,  by  no  means  a  frivolous  obligation  when 
the  needs  arising  from  a  crisis  should  drive  in  the 
notes  to  be  exchanged  for  gold,  and  the  call  for  ready 
money  was  breaking  the  market  even  for  the  govern 
ment  securities  held  against  the  bank  circulation. 

A  stronger  argument  than  the  insufficient  guaran 
tee  for  the  immediate  convertibility  of  bond-based 

1  Vide  Monetary  Times  and  Insurance  Chronicle,  vol.  ii,  p.  614,  reso 
lutions  adopted  at  a  meeting  of  bankers  held  in  the  Merchants' 
Bank  of  Canada  on  the  17th  April,  18G9. 


The  Case  against  Circulation  Secured  lij  Bonds       235 

bank  notes  and  government  issues,  was  the  lack  of 
elasticity  in  such  systems  of  currency.  This  objec 
tion,  presented  by  the  bankers  and  others  with  espe 
cial  force  in  1869,  has  since  been  emphatically  proven 
by  the  experience  of  the  United  States  during  the 
last  two  decades  with  national  bank  notes.  The  ten 
dency  of  him  who  issues  bond-secured  notes  is  to 
invest  only  so  much  of  his  capital  in  bonds  as  will, 
with  his  capital  otherwise  invested,  bring  in  the 
maximum  profit  on  the  whole  amount.  The  motive, 
therefore,  to  the  issue  or  retirement  of  notes  is  only 
remotely  governed  by  the  number  and  amount  of 
payments  to  be  effected  by  this  medium  of  exchange. 
On  the  contrary,  the  motive  is  directly  dependent 
upon  the  rate  of  interest  borne  upon  bonds  receivable 
on  deposit — a  rate  determined  by  the  government, 
and  in  large  measure  arbitrarily  determined. 

For  the  automatic  expansion  of  a  currency  issued 
upon  the  general  credit  of  the  issuer,  the  attendant 
profit,  always  equal,  practically,  to  the  market  rate 
of  interest,  is  an  infallible  impulse.  It  is  doubly 
effective,  because  it  permits  an  increase  of  his  credit, 
and  thereby  an  added  gain  to  the  issuer,  which  gen 
erally  could  not  otherwise  be  enjoyed.  But  when 
the  commercial  rate  of  discount  is  higher  than  the 
interest  paid  on  the  government  debt,  the  banker  has 
no  inducement  to  divert  his  capital  to  the  purchase 
of  bonds  to  exchange  for  notes.  Nor  will  he  have 
until  the  supply  of  loans  shall  have  been  so  increased 
by  proffers  of  capital  and  the  loanable  credit  which 
is  based  upon  capital,  and  utilized,  e  .g.,  by  the  crea 
tion  of  deposits,  that  the  rate  of  discount  falls  to  a 
point  equal  at  most  to  the  interest  borne  by  the  bonds. 
This  contingency  has  seldom  happened  where  a  gov- 


236  The  Canadian  Banking  System,  1817-1890 

eminent  is  solvent  and  in  good  credit.  The  conse 
quence  is,  as  in  New  York  and  the  United  States, 
that  the  bankers  working  under  free  banking  laws 
retire  almost  as  many  notes  as  the  law  will  permit, 
in  order  more  profitably  to  use  the  capital  by  which 
they  were  secured.  Expansion  of  the  bank  note 
currency  then  occurs  only  in  circumstances  of  pecu 
liar  stringency,  when,  as  in  1893,  a  money  famine 
forces  the  banks  to  use  every  available  device  for 
increasing  the  currency,  though  not  so  much  for 
profit  as  to  oblige  their  customers. 

With  the  currency  system  reorganized  on  the 
American  plan,  there  would  be  no  satisfactory  pro 
vision  for  the  periodical  expansion  and  contraction, 
the  causes  of  which  were  conveniently  summarized 
as  "moving  the  crops."  Mr.  King,  to  be  sure,  relied 
upon  a  regular  movement  of  money  from  east  to 
west  and  back  again,  such  as  occurs  each  year  in 
the  United  States.  But  this  plan  concentrates  large 
sums  in  the  financial  centers  at  one  time,  and  stimu 
lates  speculation,  only  to  draw  them  off  at  another, 
and  tighten  money.  The  process  is  costly  and  highly 
artificial.  It  cannot  be  used  without  considerable 
friction.  The  tasks  of  moving  the  crops  and  meet 
ing  other  periodical  demands  of  the  community  for 
increased  currency  and  credit,  e.  g.,  for  marketing 
the  wool  clip,  paying  import  duties,  negotiating  the 
lumber  cut,  buying  the  cargoes  of  the  fishing  fleet, 
paying  dividends,  etc.,  were  not  those  which  would 
employ  through  the  whole  year  the  funds  of  the  banks 
who  undertook  the  work.  In  each  of  the  provinces 
the  demands  caused  by  the  harvest  and  the  fall 
trade  were  the  greatest,  and  the  circulation  highest, 
in  October,  November  or  December.  The  difference 


The  Case  against  Circulation  Secured  by  Bonds       237 

between  the  highest  and  lowest  amount  of  notes  out 
standing  at  any  time  during  the  year,  was  from 
twenty  to  fifty  per  cent,  of  the  minimum. 

The  ability  of  the  banks  to  meet  these  brief  but 
periodical  and  heavy  demands  was  derived  from  the 
elastic  qualities  of  the  form  of  credit  in  which  the 
advances  to  lumbermen,  farmers,  produce  buyers  and 
the  like  were  made.  Deprived,  however,  of  the  ad 
vantages  arising  from  an  expansion  of  their  circula 
tion,  the  banks  would  have  slight  inducement  to  pro 
vide  for  a  business  active  during  only  three  months 
of  the  year.  That  they  should,  for  this  purpose,  be 
content  to  receive  during  eight  or  nine  months  the 
meagre  rate  of  interest  paid  by  government  on  an 
amount  of  capital  equal  to  this  expansion  and  in 
vested  in  bonds,  was  not  to  be  expected.  Yet  this 
was  the  essence  of  the  proposed  provision  for  elas 
ticity  by  deposit  of  government  securities  to  cover 
the  maximum  circulation.  The  banks  would  find 
more  attractive  investments  in  the  commercial  paper 
of  manufacturers  and  importers  engaged  in  a  steady 
business,  and  usually  requiring  money  throughout 
the  year.  The  larger  banks  might  still  have  the 
money  for  moving  the  crops,  in  the  heavy  reserve 
funds  kept  in  London  and  New  York,  but  they  were 
unlikely  to  withdraw  these  sums  unless  moving  the 
crops  were  more  profitable  than  loaning  at  call  in 
New  York  or  London.  During  the  autumn  of  1868, 
gold  w^as  worth  1/16  to  1  per  cent.,  per  diem,  in  New 
York.1  The  substitution  of  a  bond-based  for  a  credit 
currency,  and  the  forced  retirement  of  the  latter 
necessarily  involved  comparative  rigidity  and  lessen 
ing  of  discount  accommodation.  For  the  farmers 

Journal  of  the  House  of  Commons,  Canada,  1869,  Appendix  I, 
Reply  of  Mr.  James  Stevenson  to  question  9. 


238  TJie  Canadian  Banking  System,  1817-1890 

and  those  dependent  upon  them,  the  most  important 
class,  numerically  at  least,  in  the  whole  community, 
these  results  meant  scarcity  of  money  during  harvest 
time,  reduced  prices  for  cereals  and  other  products, 
and  serious  annual  injury. 

In  yet  another  way  were  the  interests  of  the  farm 
ing  community  opposed  to  the  introduction  of  the 
American  system.  Upon  this  point  I  prefer  to  quote 
the  admirable  discussion  by  Mr.  George  Hague: 
"The  question  of  bank  circulation  is  essentially  a 
question  for  the  agricultural  districts,  and  the  small 
towns  and  villages  which  derive  their  existence  and 
support  from  them.  Withdrawing  bank  circulation 
or  covering  it  with  Government  securities,  would  be 
felt  far  more  severely  in  such  districts  than  in  com 
mercial  centres.  There  is  no  considerable  volume 
of  circulation  in  large  towns  and  cities,  either  in 
Canada  or  anywhere  else;  business  being  transacted 
mostly  in  cheques,  and  the  system  of  depositing  in 
banks  being  almost  universal,  very  little  interrup 
tion  would  be  caused  to  business  there  by  the  with- 
drawment  of  circulation,  except  by  reaction  from  the 
smaller  towns.  But  in  the  country  districts  bank 
circulation  is  a  matter  of  vital  importance,  for  the 
banking  facilities  which  are  essential  to  their  de 
velopment  are  largely  derived  from  it.  In  case  of 
an  alteration  of  the  currency  laws,  there  can  scarcely 
be  a  doubt  that  the  loans  of  the  banks  in  country 
towns  would  be  largely  cut  down.  Many  agencies 
would  become  so  unprofitable  under  this  process  that 
they  would  be  discontinued  altogether,  and  all  of 
them  would  be  injuriously  affected."1 

llbid,  Reply  to  question  2. 


Mr.  Rose's  Banking  Scheme  239 

g  39. MR.    ROSE'S    BANKING    SCHEME 

It  would  be  hard  to  estimate  in  what  measure  the 
Minister  of  Finance  was  influenced  by  the  evidence 
obtained  through  his  committee.  The  characteristic 
points  of  the  currency  and  banking  resolutions 
which  he  presented  to  the  House  of  Commons  on  the 
14th  May,  1869,  were  decided  upon,  it  is  highly 
probable,  before  the  original  committee  was  struck. 
The  resolutions  had  been  prepared  under  the  super 
vision  of  Mr.  E.  H.  King,  and  as  in  the  memorandum 
approved  by  his  board  of  directors  a  year  and  a  half 
before,  the  leading  feature  was  the  reconstruction 
of  Dominion  bank  law  upon  the  model  of  the 
"National  Bank  Act"  of  the  United  States.1 

The  Government  proposed  to  leave  the  banks  alone 
until  the  1st  July,  1871,  but  after  that  (a)  to  oblige 
them  gradually  to  reduce  their  unsecured  circulation 
by  20  per  cent,  a  year  until  thekwhole  should  be  re 
tired;  (6)  to  permit  the  banks  to  issue  instead,  up  to 
the  amount  of  their  capital  stock  paid  in,  notes  of 
uniform  appearance,  furnished  by  the  government, 
and  bearing  on  their  face  the  statement  of  their  being 
secured  by  the  deposit  of  Dominion  securities;  these 
notes  were  to  be  procurable  by  the  deposit  of  gold  or 
Dominion  notes  with  the  government,  whose  officers 
were,  in  return,  to  furnish  the  bank  with  notes  to  an 
equal  amount,  and  to  hold  against  them  securities  is 
sued  for  the  purpose,  and  bearing  interest  for  ten 
years  after  the  1st  July,  1871;  (c)  to  make  the  secured 
notes,  so  long  as  they  were  redeemed  in  specie,  legal 
tender  throughout  the  Dominion,  except  at  the  office 
of  the  issuing  bank,  and  a  redemption  office  to  be  es- 

1  Letter  of  Mr.  George  Hague,   Montreal   Gazette,  30th  January 
1890. 


240  The  Canadian  Banking  System,  1817-1890 

tablished  and  kept  at  Montreal,  or  the  capital  city  of 
the  province  in  which  the  bank  should  be  situate;  (d) 
to  require  the  banks  to  hold  reserves  of  specie  equal 
to  20  per  cent,  of  the  secured  notes  in  circulation,  and 
one-seventh  of  the  deposits  at  call;  (e)  to  make  the 
notes  the  first  charge  upon  the  assets  of  the  bank  in 
case  of  insolvency,  the  deposits  at  call  and  not  bear 
ing  interest,  the  second  charge;  (/)  to  impose  upon 
the  banks  a  variety  of  safeguards  and  restrictions 
similar  to  those  already  in  force,  and  to  others  recom 
mended  by  the  bankers;  to  prohibit  note  issue,  except 
by  incorporated  banks  and  the  government,  to  grant 
no  new  charter,  and  to  renew  no  old  one  except  upon 
the  conditions  set  forth  in  the  resolutions.1 

In  the  speech  introducing  his  resolutions,  Mr.  Rose 
averred  that  the  Government  had  no  hostility  towards 
the  banks,  and  felt  that  for  the  important  commercial 
operations  essential  to  the  country's  prosperity,  it  was 
indispensably  necessary  that  the  banks  should  be 
prosperous.  The  Government,  he  said,  had  no  espec 
ial  object  of  its  own  to  gain  by  the  substitution  of  a 
system  of  banking  different  from  that  then  existing. 
For  the  proposals  which  I  have  included  under  group 
"f,"  there  is  neither  time  nor  need  to  analyze  his  ar 
guments.  These  questions  must  be  treated  further 
on.  With  respect  to  the  proposed  changes  in  the 
system  of  note  issue,  the  Minister  declared  that,  "It 
is  the  duty  of  the  Government  not  to  interfere  with 
banking  proper,  but  to  see  that  the  circulation  which 
the  public  at  large  is  bound  to  take,  should  be  placed 
on  as  sound  and  wholesome  a  footing  as  possible." 
Or  again,  "It  is  of  essential  importance  to  the  inter 
ests  of  the  country  that  the  circulating  medium  should 
Hamilton  Spectator,  17th  May,  1869. 


Mr.  Rose's  Banking  Scheme  241 

be  placed  on  a  sound  and  uniform  basis.''1  If  the 
conclusions  of  chapter  v,2  as  to  the  legal  and  econ 
omic  character  of  bank  notes,  are  correct,  we  cannot 
accept  the  Finance  Minister's  implication  that  the 
note  issue  is  not  a  function  of  banking  in  the  strictest 
sense  of  the  term.  As  to  his  protest  that  "the  Gov 
ernment  has  no  especial  object  of  its  own  to  gain;  the 
Government  is  not  embarrassed  by  any  pressing 
wants,"  it  will  be  well  to  remember  that,  by  the 
terms  of  the  British  North  America  Act,  the  Domin 
ion  was  obliged  to  construct  the  Intercolonial  Railway 
between  Quebec  and  the  Maritime  Provinces.  The 
twelve  millions  odd  which  could  have  been  obtained 
by  requiring  the  currency  of  the  country  to  be  covered 
by  government  bonds,  may  or  may  not  have  affected 
the  attitude  of  the  Minister  of  Finance  towards  the 
banking  system.  The  reader  can  judge. 

Further  than  that  the  currency  of  Canada  should 
be  secured  and  uniform  throughout  the  provinces, 
Mr.  Rose  found  little  to  say.  These  desiderata  were 
certainly  important,  and  we  may  acknowledge  now 
that  during  the  next  twenty  years  they  would  have 
been  more  nearly  gained  under  his  plan  than  under 
the  policy  that  finally  prevailed.  But  they  would 
have  been  secured  at  the  cost  of  elasticity  and  ade 
quacy  in  the  currency,  relative  shrinkage  of  discount 
accommodation,  and  artificial  rise  in  the  average  rate 
of  discount.  So  great  a  cost  can  hardly  be  compared 
with  the  few  losses  caused  by  the  nominally  unsecured 
currency  that  Canada  retained. 

Some  intimation  of  the  Government's  plans  had 
gotten  out  before  the  resolutions  were  presented.  On 

1  Ottawa  Times,  15th  May,  1869. 

2  Vide  note  at  end  of  chapter  v. 

16 


242  The  Canadian  Banking  System,  1817-1890 

the  17th  April,  1869,  the  banks  of  Ontario  and  Quebec 
adopted  resolutions:  "That  in  any  renewal  of  the 
charters,  it  is  important  for  the  best  interests  of  the 
public  that  no  changes  of  fundamental  character  be 
made  in  the  system,  and  particularly  that  the  note 
circulation  be  preserved."1  On  the  same  day  the 
Halifax  banks  declared  that  the  system  in  force  in 
Nova  Scotia  had  proved  satisfactory,  that  any  change 
was  neither  asked  for  nor  desired.  During  the  ses 
sion,  some  seventy-two  petitions,  either  against  the 
resolutions  of  Mr.  Hose,  or,  "that  no  changes  of  a 
fundamental  character  be  made  in  the  present  system 
of  banking,"  or,  "that  the  circulation  of  the  banks 
maybe  preserved  on  substantially  the  present  basis," 
were  presented  to  the  House  of  Commons.  Of  these 
petitions,  some  ten,  to  be  sure,  came  from  the  banks; 
the  others  were  from  the  leading  towns,  cities,  boards 
of  trade,  and  the  like,  throughout  the  Dominion,  and 
respectable  as  well  for  the  number  of  signatures  as 
for  the  character  and  influence  of  the  signers. 

On  the  1st  June  the  resolutions  came  up  for  con 
sideration.  Mr.  Holton  believed  that  such  radical 
changes  in  the  long-established  banking  system  of 
the  country  should  not  be  made  without  mature  de 
liberation  in  Parliament  and  in  the  country.  He 
immediately  moved,  in  amendment,  to  postpone  the 
consideration  of  the  resolutions  until  the  next  ses 
sion.2  The  debate  that  followed  was  acrimonious, 
able  and  suggestive.  Mr.  MacKenzie  seconded  the 
motion,  and  bore  witness  to  the  nearly  unanimous 
opposition  of  the  press  to  Mr.  Kose's  policy.  As  a 
whole,  the  scheme  had  been  universally  condemned.3 

1  Monetary  Times  and  Insurance  Chronicle,  vol.  ii.,  p.  614. 
2 Hamilton  Spectator,  2d  June,  1869. 
^Ottawa  Times,  4th  June,  1869. 


Mr.  Rose's  Banking  Scheme  243 

Mr.  Cartwright  conceded  the  few  tolerable  argu 
ments  that  the  Government  had  urged,  and  thus  con 
ceded  all  they  were  to  urge,  for  in  his  first  speech 
Mr.  Rose  quite  exhausted  his  arsenal.  But,  Mr.  Cart- 
wright  objected,  the  plan  involved  a  radical  change. 
If  the  government  should  issue  new  securities  to 
cover  the  notes,  the  loan  was  practically  compulsory. 
The  measure  would  especially  affect  Ontario,  where 
the  annual  expansion  of  the  currency  and  the  need 
for  it  were  the  greatest.  The  proposal  utterly  wanted 
provision  for  elasticity.  Mr.  Rose  had  miscalculated 
the  amount  necessary,  after  his  plan  became  law,  to 
restore  the  banks  to  their  previous  position.  In 
Ontario,  alone,  it  would  need  eight  or  nine  millions.1 
Mr.  Gait  argued  that  the  National  Banking  System 
had  never  been  tried  by  the  sufficient  test  of  working 

'In  case  the  plan  was  carried  through,  and  the  banks  accepted  it, 
said  Mr.  Rose,  they  would  need,  to  cover  maximum  circulation,  as 

On  the  31st  October,  1868 $15,120,000 

20  per  cent,  of  the  maximum  circulation  to  be 

held  as  specie  reserve 3,024,000 

1/7  of  deposits  at  call,  not  bearing  interest,  to  be  * 

held  as  specie  reserve 1,968,000 


$20,112,000 
Less  specie,   Dominion  notes  and  Government 

debentures,  already  held  by  the  banks 11,785,000 

Difference  under  Mr.  Rose's  plan $  8,327,000 

equivalent  to  7.05  per  cent,  upon  the  highest  circulation,  for  seven 
years  (the  period  of  transition),  or  2.03  per  cent,  upon  the  highest 
figure  yet  reached  by  the  item  of  discounts  (Ottawa  Times,  15th  May, 
1869.) 

Mr.  Rose,  however,  omitted  all  account  of  the  large  amounts  of 
unissued  notes,  which  as  till  money  in  the  hands  of  branches,  were 
ample  and  costless  substitutions  for  equal  amounts  of  specie,  and 
yet  never  appeared  in  the  returns  of  the  "Notes  in  Circulation." 
This  advantage  would  have  been  lost  under  his  scheme,  as  well  as 
the  peculiar  benefits  derived  by  country  districts  from  branch  banks 
and  the  note  issue  according  to  the  existing  system. 


244  The  Canadian  Banking  System,  1817-1890 

on  the  gold  basis.  He  objected  to  the  plan  of  maxi 
mum  deposit  of  security  as  unlikely  to  work,  and 
declared  the  time  unpropitious  for  so  radical  a  change. 
Friends  of  the  Government,  among  them  Mr.  Tilley, 
spoke  in  reply.  Debate  was  continued  with  spirit 
until  midnight.  General  and  strong  opposition  to 
the  plan,  even  by  staunch  supporters  of  the  Govern 
ment,  was  thoroughly  and  ably  manifested. 

The  next  day  the  resolutions  were  considered  in 
the  Privy  Council,  and  rumors  of  a  cabinet  disagree 
ment  became  current  in  Ottawa.1  Certain  it  is  that 
during  the  next  fortnight  many  of  the  earlier  con 
verts  lost  faith  in  the  banking  theories  of  Mr.  Rose. 
The  Government  had  more  important  ends  than 
forcing  a  rejuvenated  currency  scheme  upon  the 
country,  approved  though  it  was  by  their  own  Finance 
Minister,  by  the  general  manager  for  their  fiscal 
agents,  and  even  by  worthy  statesmen  in  the  great 
republic  on  their  south.  They  could  ill  afford  to  im 
peril  their  majority,  and  they  left  the  banking  ques- 
tion  undisturbed  until  the  loth  of  June.  The  Minister 
of  Finance  then  announced  to  the  House  of  Com 
mons  that  "the  Government  would  have  been  glad 
if  there  had  been  a  ready  acquiescence  in  the  princi 
ples  involved  in  the  resolutions.  But,  believing  as 
they  still  did,  that  the  reforms  embodied  in  them 
were  such  as  to  meet  with  the  general  acceptance  of 
the  country,"  the  Government  was  willing  tempora 
rily  to  withdraw  its  proposals.  "In  the  next  ses 
sion  of  Parliament  the  Government  would  again 
bring  before  the  House  the  consideration  of  these 
resolutions.'" 

1  Hamilton  Spectator,  3d  June,  1869. 
2 Hamilton  Spectator,  16th  June,  1869. 


The  Banking  Policy  of  Sir  Francis  Hincks         245 

Two  and  a  half  months  later,  the  Hon.  John  Rose 
had  resigned  the  Ministry  of  Finance.  Upon  his 
departure  from  the  Government,  the  defeat  already 
inflicted  on  the  dangerous  banking  policy  which  he 
advanced,  became  certain  and,  in  great  measure, 
permanent. 


§  40. — THE    BANKING    POLICY  OF  SIR  FRANCIS    HINCKS 

Neither  the  precedents  of  Mr.  Gait  nor  the  plans 
of  Mr.  Rose  were  followed  by  the  next  Minister  of 
Finance.  Sir  Francis  Hincks,  having  spent  the  pre 
ceding  fifteen  years  as  a  crown  governor  in  the 
British  Colonial  service,  was  now  returned  to 
Dominion  politics,  and  had  accepted  a  seat  in  the 
Cabinet.  Sir  Francis  resolved  to  consult  the  bank 
ing  experts  before  he  prepared  his  proposals  for  a 
general  Dominion  Bank  Act.  In  the  conferences 
which  were  held  the  bankers  found  opportunity  to 
express  their  views  directly  to  the  government.1 

What,  probably,  was  the  attitude  of  the  bankers 
towards  the  question  in  1870  ?  They  believed,  pre 
sumably,  that  good  banks  were  conducive  to  the 
general  well-being  of  the  country,  that  upon  this 
well-being  their  own  prosperity  was  largely  depen 
dent.  The  natural  and  preferable  view  is  that  the 
principal  object  of  the  bankers  was  to  secure  the 
revision  of  banking  law  best  calculated  to  promote 

1 1  am  informed  by  the  Department  of  Finance  that  of  these  meet 
ings  no  minutes  were  kept.  From  the  student's  point  of  view,  the 
lack  of  such  records  is  most  unfortunate.  They  would,  no  doubt, 
have  filled  many  volumes;  a  vast  amount  of  contemporary  evidence 
upon  that  stage  of  Canadian  banking  would  have  been  preserved 
and  much  light  thrown  upon  the  real  position  both  of  the  bankers 
and  of  the  Government. 


246  The  Canadian  Banking  System,  1817-1890 

the  soundness,  security  and  efficiency  of  the  banking 
system.  Whatever  their  ultimate  purposes  in  1859, 
1868  and  1869,  it  was  not  the  advantages  which  they 
might  themselves  enjoy  under  carelessly  constructed 
legislation  that  appeared  to  determine  the  proposals 
for  reform  submitted  by  the  several  banks.  It  was 
the  desire  for  restrictions  upon  loose,  unsound  and 
illegitimate  practice  by  their  rivals  and  competitors. 
The  same  remark  is  true  for  1880  and  1890.  One  may 
conclude,  therefore,  that  had  their  ends  in  1869-71 
been  purely  selfish,  the  practical  action  of  the  bankers 
would  have  been  no  different  from  what  might  have 
been  expected  according  to  our  other  view  of  their 
motives.  We  should  have  had  then  an  apt  Canadian 
example  for  Adam  Smith's  observation  of  man's 
strife  for  personal  gain:  "By  pursuing  his  own 
interest,  he  frequently  promotes  that  of  the  society 
more  effectually  than  when  he  really  intends  to  pro 
mote  it."1 

The  policy  of  the  Government  was  indicated  in  the 
speech  with  which  the  Governor- General  opened 
Parliament,  the  16th  February,  1870  :  "A  measure 
intended  to  secure  safety  to  the  community,  without 
interfering  with  the  legitimate  operations  of  the 
banks,  will  be  submitted  for  your  consideration,  and 
will.  I  trust,  be  found  calculated  to  place  these 
important  interests  upon  a  sound  and  stable  basis. ": 
On  the  1st  March,  Sir  Francis  Hincks  brought  down 
to  the  House  of  Commons  his  Resolutions  on  Banking 
and  Currency.3  In  the  speech  introducing  his 

1  "Wealth  of  Nations,"  bk.  iv.,  chap.  ii. 

2  Parliamentary  Debates,  Canada,  vol.  i.,  p.  27.  This  is  the  first  of 
th  e  two  volumes  of  reports  published  as  a  private  undertaking  before 
the  official  series  began,  and  ordinarily  known  as  ' 'Cotton  Debates." 

3The  resolutions  are  to  be  found  in  the  Canadian  newspapers  of 
the  2d  March,  1870,  and  in  the  report  of  the  Debates  for  the  pre 
vious  day. 


The  Banking  Policy  of  Sir  Francis  Hincks         247 

measures  the  Minister  of  Finance  emphasized  the 
need  of  adopting  a  general  and  uniform  banking  law 
for  the  whole  Dominion,  a  need  rendered  the  more 
imperative  by  the  charters  about  to  expire,  and  the 
petitions  then  before  Parliament  for  new  incorpor 
ations.  The  safeguards  about  the  currency  were 
different  in  the  different  provinces,  and  the  limita 
tions  upon  issue  different.  Experience  taught  that 
the  note  holders  should  have  greater  security.  Yet 
the  people  were  used  to  the  credit  accommodation 
based  upon  the  note  issue,  there  being  not  less  than 
eight  or  nine  million  dollars  of  such  loans  in  Ontario 
and  Quebec  alone.  Owing  to  the  necessity,  under 
the  American  system,  to  withdraw  this  accommoda 
tion,  it  was  not  expedient  to  have  the  currency 
covered  by  deposit  of  government  securities.  Public 
opinion,  said  Sir  Francis,  was  against  a  government 
Bank  of  Issue,  and  he  disclaimed  any  plan  of  that 
character.  He  deprecated  appeals  to  sectional  feel 
ing.  And  that  they  might  be  brought  to  the  greatest 
possible  perfection,  he  urged  the  House  to  treat  the 
resolutions  in  an  unpartisan  spirit.1 

The  debates  in  the  House  turned  mostly  upon 
questions  of  minor  detail.  It  is  characteristic  of 
ministerial  government  that  the  trenchant  and  deci 
sive  discussions  are  frequently  carried  on  and  con 
cluded  in  council  chambers  or  departmental  offices 
long  before  the  final  measure  is  submitted  to  the 
legislature.  Under  Sir  Francis  Hincks,  moreover, 
the  banking  policy  of  the  Government  had  been 
almost  completely  reversed  within  the  year.  The 

lfThis  condensed  expose  of  the  Minister's  principal  motives  is  col 
lated  from  his  introductory  speech,  and  the  remarks  afterwards 
made  by  him  in  the  course  of  the  debate. 


248  The  Canadian  Banking  System,  1817-1890 

retention  of  the  bank  note  issue  against  general 
credit,  for  which  the  Opposition  fought  in  1869,  was 
now  conceded.  Still,  the  resolutions  were  in  some 
respects  a  compromise,  and,  as  a  compromise,  open 
to  objections. 

One  of  the  more  important  contests  occurred  over 
the  minimum  of  capital  on  which  a  bank  should  be 
permitted  to  begin  and  to  continue  its  business.  This 
discussion  was  stimulated  by  Sir  A.  T.  Gait,  who 
objected  to  the  original  proposal  of  the  Minister  to 
require  $1,000,000,  of  which  $200,000  should  be  paid 
up  before  the  beginning  of  business,  and  twenty  per 
cent,  in  each  year  thereafter.  Branch  banks,  he 
said,  were  not  the  best  provision  for  rural  districts; 
in  times  of  pressure  the  larger  banks  contract  their 
rural  loans  to  meet  urban  drains.  Others  said  that 
managers  of  local  banks  are  more  interested  in  the 
welfare  of  the  surrounding  country,  and  know  more 
of  rural  necessities.  Local  banks,  they  thought, 
better  serve  the  country.  Rural  districts  cannot 
raise  the  larger  capital,  and  have  no  business  which 
requires  it.1  -  To  permit  the  existing  small  banks  to 
go  on,  and  not  to  provide  for  new  ones,  was  to  per 
petuate  an  objectionable  anomaly.2 

Sir  Francis  replied  that  it  was  necessary,  under 
the  system  of  note  issue  adopted,  to  provide  the 
security  of  a  large  paid-up  capital.  Any  person  de 
siring  to  invest  in  banks  would  have  no  difficulty  in 
obtaining  shares  in  some  of  the  established  banks. 
"There  was  no  difficulty  in  establishing  agencies  in 
all  places  where  agencies  should  be  established.  His 

1  Debates  ut  supra,   pp.   265,    267,   311,    Messrs.  Gait,  Colby  and 
Pickard. 

2 Ibid,  Messrs.  Mackenzie  and  Cartwright. 


The  Banking  Policy  of  Sir  Francis  Hincks         249 

impression  was  that  both  in  the  United  States  and  in 
this  country,  where  you  found  in  any  district  a  de 
mand  for  small  banks  with  small  capital,  the  truth 
was  the  people  who  wanted  it  were  borrowers  and 
not  lenders.  *  *  *  *  *  Existing  banks  could 
get  their  charters  renewed  without  increasing  their 
capital."1  Small  banks,  he  concluded,  were  always 
looked  upon  with  a  certain  amount  of  suspicion.  But 
in  the  Maritime  Provinces  local  banking  was  in  more 
general  favor  and  better  established  than  in  Ontario 
and  Quebec.  Chiefly  to  meet  their  needs,  Sir  Fran 
cis  Hincks  conceded  the  reduction  of  the  minimum 
authorized  capital  to  $500,000,  the  payment  of  40  per 
cent,  of  which  was  required  before  the  corporation 
should  begin  business. 

The  clause  of  the  resolutions  limiting  the  total  lia 
bilities  of  any  bank  to  thrice  the  paid-up  capital 
stock,  plus  its  specie  and  government  debentures,  was 
withdrawn.  It  was  not  the  same  restriction  upon 
the  debts  of  a  bank  which  appears  in  the  province 
of  Canada  charters  and  the  circulars  from  Downing 
street,  for,  according  to  that,  deposits  with  the  bank 
were  expressly  excluded  from  the  reckoning.  The 
sole  effect,  had  it  been  retained,  would  have  been  to 
prevent  a  large  accumulation  of  deposits  in  one 
bank.  Depositors  are  influenced  by  the  bank's  rep 
utation;  to  limit  the  amount  of  deposits  would  have 
been  to  impair  the  motive  to  enhance  that  reputation 
by  careful  management. 

When  he  first  took  up  the  question  Sir  Francis 
Hincks  believed  that  the  banks  should  be  required 
to  hold  as  minimum  reserves  an  amount  of  specie 
equal  to  a  fixed  proportion  of  their  liabilities.  But 

1  Debates  ut  supra,  p.  310. 


250  The  Canadian  Banking  System,  1817-1890 

\ 

in  the    conferences    with  the   bankers  the  Finance 

Minister  was  convinced  by  the  unanimous  opinion 
and  strong  arguments  offered  against  such  a  provi 
sion.  The  regulation  was  omitted  from  the  resolu 
tions,  and  the  omission  justified  by  the  principle  that 
a  reserve  which  must  not  be  used  is  no  reserve  at  all, 
that  if  the  proportion  required  were  only  moderate, 
the  tendency  would  be  to  regard  that  as  sufficient, 
and  that  all  of  the  immediately  available  funds  of  a 
bank,  e.  g.,  the  New  York  and  London  balances  are 
not  specie.1 

The  scheme  to  give  increased  security  to  the  note 
holders  by  making  its  notes  a  first  lien  upon  a  bank's 
assets  in  case  of  insolvency,  was  also  rejected.  The 
bankers  had  officially  suggested  it  in  their  resolutions 
of  the  17th  April,  1869;  they  had  mentioned  it  in  evi 
dence  given  to  several  of  the  parliamentary  com 
mittees.  It  was  also  approved  by  such  publicists  as 
the  Hon.  R.  J.  Cartwright  and  Sir  A.  T.  Gait.  Sir 
Francis  Hincks  held  to  the  view  that  through  such 
a  provision  the  stability  of  the  banks  would  be 
jeopardized  by  the  tendency  of  depositors  to  start 
runs  in  order  to  convert  their  ordinary  claims  into 
privileged  liens. 

Some  objections  were  made  to  the  plan  by  which 
the  banks  lost  the  right  to  issue  notes  for  sums  under 
$4,  but  the  banks  deliberately  and  avowedly  sur 
rendered  this  right  for  valuable  considerations,  to 
wit:  abolition  of  the  tax  of  one  per  cent,  per  annum 
upon  their  note  circulation,  and  repeal  of  the  require 
ment  to  keep  one-tenth  of  actual  capital  in  Dominion 
securities.  For  some  years,  moreover,  the  bankers 

1  George  Hague,  "Bank  Reserves,"  Journal  of  the  Canadian  Bank 
ers'  Association,  vol.  i.,  p.  107;  Debates,  ut  supra,  p.  217. 


The  Banking  Policy  of  Sir  Francis  Hincks         251 

had  not  thought  the  privilege  an  unmixed  benefit. 
In  times  of  difficulty  the  small  notes  always  gave 
the  most  trouble.  The  majority  of  holders  were 
usually  poor,  ignorant,  or  easily  alarmed;  a  run  upon 
a  bank  once  started,  they  always  joined  the  attack 
in  great  numbers,  and  among  them  the  fear  of  loss 
reached  its  most  violent  manifestation.  The  restric 
tion  had  been  frequently  urged  by  bankers  them 
selves  as  a  necessary  reform. 

The  severest  struggle  of  the  whole  debate  occurred 
on  the  question  suggested  by  the  preceding  change, 
and  closely  connected  with  it.  Pursuant  to  his  policy 
of  placing  all  the  banks  upon  the  same  footing,  the 
Minister,  on  the  14th  February,  1870,  notified  the 
Bank  of  Montreal  of  the  government's  desire  to 
terminate  at  the  end  of  six  months  the  arrangement 
made  with  it  for  the  issue  and  redemption  of  pro 
vincial  notes.  The  plan  of  paying  for  that  service 
by  commission  was  disadvantageous  to  the  govern 
ment.1  Sir  Francis  now  proposed  that  the  govern 
ment  should  assume  the  issue,  as  Dominion  notes,  of 
the  paper  currency  under  $4,  and  that  the  banks 
should  be  required  to  hold  50  per  cent,  of  their  cash 
reserves  in  Dominion  legal  tenders.  He  had  devised 

1Ple  had  further  freed  the  government  from  the  agreement  of  the 
9th  November,  1865,  by  which  they  were  obliged  to  keep  from  $400,- 
000  to  $500,000  at  their  credit  in  the  Bank  of  Montreal  without 
interest,  not  to  retire  their  account  without  six  months'  notice,  not 
to  give  such  notice  while  the  bank  was  under  advances  to  the  gov 
ernment,  and  not  during  the  same  term  to  deposit  the  public  moneys 
elsewhere  than  in  the  Bank  of  Montreal.  To  Sir  Francis  Hincks 
is  also  due  the  competition  in  buying  or  selling  government  ex 
change,  established  by  the  practice  of  inviting  telegraphic  tenders 
from  all  the  banks.  Previous  to  this  one  bank  had  enjoyed  a 
scarcely  qualified  monopoly.  Vide  Journal  of  the  House  of  Com 
mons,  Canada,  1870,  Appendix  2,  pp.  4,  5  and  10. 


252  The  Canadian  Banking  System,  1817-1890 

a  system  of  regulating  the  Dominion  note  issue  dif 
ferent  from  the  one  in  force. 

The  principle  of  this  regulation  was  that  admired 
and  advocated  by  the  Minister,  even  before  it  was 
adopted  by  Sir  Robert  Peel  in  the  Bank  Act  of  1844. 
He  believed  that  the  "functions  of  the  Issue  Depart 
ment  should  be  automatically  confined  to  the  ex 
change  of  gold  for  notes,  and  vice  versa;  that  an 
amount  can  be  established  which  may,  with  perfect 
safety,  be  issued  upon  public  securities,  and  all  beyond 
that  fixed  amount  should  be  held  in  gold."1  The 
practical  measures  embodying  this  principle  were: 

(a\  The  management  of  the  Dominion  note  circulation  directly  by 
the  Government; 

(6)  The  establishment  of  branch  offices  of  the  Receiver-General's 
Department  in  Montreal,  Halifax,  St.  John  and  Toronto,  for  the 
issue  and  redemption  of  notes; 

(c)  The  authorized  extension,   by  Order-in-Council  on  report  of 
the  Treasury  Board,  of  the  issue  to  $9,000,000,  in  amounts  of  not 
more  than  $1,000,000  at  a  time,  and  at  intervals  of  not  less  than 
three  months; 

(d)  The  requirement  that  the  Receiver-General  should  hold  specie 
and  Dominion  debentures  to  cover  the  outstanding  circulation;  the 
debentures  to  be  issued  and  held  for  the  purposes  of  the  Act,  or  to 
be  disposed  of  temporarily  or  absolutely  in  order  to  provide  specie 
for  redemption;  the  debentures  not  to  exceed  80  per  cent,  of  the 
circulation;  the  specie,  as  a  rule,  to  be  a  sum  equal  to  25  per  cent. 
of  the  debentures,  and  never  less  than  15  per  cent. 

(e)  Provision  for  the  issue  of  any  amount  required  by  the  public 
convenience,  so  long  as  the  excess  over  $9,000,000  should  be  covered 
by  equivalent  amounts  of  specie.2 

The  Opposition  favored  the  provision  concerning 
bank  reserves  as  little  as  they  did  the  plan  to  aug- 

*  Monetary  Times  and  Insurance  Chronicle,  vol.  vii,  p.  725.  Letter 
of  Sir  Francis  Hincks. 

2 Statutes,  Canada,  1870,  p.  41,  33  Vic.,  cap.  9,  "An  Act  to  amend 
the  Act  31  Vic.,  cap.  46,  and  to  regulate  the  issue  of  Dominion 
notes." 


The  Banking  Policy  of  Sir  Francis  Hinclcs         253 

ment  the  legal  tender  issue.  Mr.  MacKenzie  advo 
cated  the  policy  of  non-interference  by  government, 
emphasized  the  tendency  of  government  issues  to 
depreciate,  and  accused  Sir  Francis  of  resorting  to 
the  proposed  increase  as  a  help  in  concealing  the 
million  dollar  deficit  which  Mr.  MacKenzie  detected 
in  the  country's  finances.1  Mr.  Cartwright  objected 
to  the  first  proposal,  because,  first,  it  tended  unduly 
to  diminish  the  amount  of  gold  reserves  which  should 
be  held  in  the  country;  second,  it  was  a  scheme  to 
borrow  a  large  sum  of  money  at  call,  or  at  short 
time;  third,  it  appeared  to  him  to  be  an  expedient  of 
somewhat  objectionable  morality  in  a  political  sense. 
Others  complained  that  the  rule  would  be  simply  a 
means  of  forcing  from  the  banks  a  permanent  loan 
equal  to  half  their  reserves.  Their  arguments  will 
be  more  or  less  approved  according  to  the  reader's 
point  of  view. 

In  any  case  these  measures  of  the  Government 
must  be  regarded  as  a  fiscal  expedient  rather  than 
a  banking  reform.  The  Government,  without  doubt, 
was  obliged  to  do  something  with  Dominion  notes 
already  in  circulation.  The  Minister's  plan  for  regu 
lating  the  issue  was  a  marked  improvement  on  that 
adopted  by  his  predecessors.  Even  had  he  so  wished 
he  would  have  scarcely  been  able  to  provide  the 
means  for  redemption  of  this  debt.  Furthermore, 
the  banking  interests  demanded  certain  privileges, 
among  them,  a  monopoly  of  the  circulation  of  the 
country.  Sir  Francis  felt  obliged  "  to  contend  in  the 
interests  of  the  public  at  large,  that  they  were  enti 
tled  to  some  share  in  the  profits  of  the  circulation." 
Though,  in  the  preceding  pages,  we  have  not  accepted 
debates,  ut  supra,  pp.  256  and  822;  ibid,  p.  504. 


254          The  Canadian  Banking  System,  1817-1890 

this  view  of  the  state's  relation  to  the  currency,  it 
must  be  said,  nevertheless,  that  to  many  the  reserve 
requirement  seemed  only  a  fair  price  for  the  conces 
sions  granted  by  the  government  to  the  banks.  The 
regulation  was  modified  slightly  while  under  discus 
sion  and  finally  adopted  by  Parliament  in  the  follow 
ing  form:  "The  bank  shall  always  hold,  as  nearly  as 
may  be  practicable,  one-half  of  its  Cash  Reserves  in 
Dominion  notes,  and  the  proportion  of  such  reserves 
held  in  Dominion  notes  shall  never  be  less  than  one- 
third  thereof."  (33  Vic.,  cap.  2,  §  5.) 


g41. — THE    "ACT    RESPECTING    BANKS  AND    BANKING, 

1870 

The  "Act  respecting  Banks  and  Banking,"  em 
bodying  the  resolutions  prepared  by  the  Minister,  was 
passed  by  the  House  of  Commons  the  5th  April,  by 
the  Senate  upon  the  12th,,  and  received  the  royal 
assent  the  12th  May,  1870.  (33  Vic.,  cap.  2.) 

It  provided  that  in  any  act  establishing  a  new  bank 
or  renewing  the  charter  of  any  existing  bank,  the 
following  restrictions  should  be  incorporated,  certain 
exceptions  being  granted  in  order  to  confirm  peculiar 
features  in  the  charters  of  the  Bank  of  British  North 
America  and  La  Banque  du  Peuple: 

(a)  The  bank  shall  not  issue  notes  or  begin  a  banking  business 
till  $200,000  of  its  capital  shall  have  been  bona  fide  paid  up,  and  the 
fact  certified  to  by  the  Treasury  Board. 

(b)  Twenty  per  cent,  of  the  subscribed  capital  shall  be  paid  each 
year  after  the  beginning  of  business. 

(c)  The  notes  in  circulation  shall  not  exceed  the  amount  of  the 
bank's  unimpaired  paid-up  capital,  and  no  note  shall  be  issued  for 
less  than  $4. l 

i  By  a  separate  statute  the  banks  in  Nova  Scotia  acting  under  provincial 
charters  were  empowered  to  issue  notes  for  $4  and  upwards,  $20  having  been 
the  lowest  denomination  permitted  by  the  laws  of  the  province.  (33  Vic.,  cap. 
120 


The  "Act  Respecting  Banks  and  Banking,"  IS  70     255 

(d)  Notes  of  the  bank  shall  be  received  in  payment  at  any  of  its 
offices,  but  shall  not  be  payable  in  specie  or  Dominion  notes  at 
places  other  than  where  they  may  be  made  payable.  One  of  such 
places  shall  always  be  the  bank's  chief  seat  of  business. 

(«)  Uusually  half,  and  not  less  than  one-third,  of  the  cash  reserve 
shall  be  held  in  Dominion  notes. 

(/)  No  loans  or  discounts  shall  be  made  on  the  security  of  the 
bank's  own  stock,  but  the  bank  shall  have  a  privileged  lien  for  any 
overdue  debt  on  the  shares  and  unpaid  dividends  of  its  debtors, 
and  may  decline  to  transfer  such  shares  until  the  debt  is  paid. 

(g)  The  paid-up  capital  shall  not  be  impaired  by  any  division  of 
profits.  Directors  concurring  in  such  impairment  shall  be  individu 
ally  liable  for  the  amount  as  for  a  debt  due  to  the  bank.  Capital 
lost  shall  be  made  up  forthwith  by  calls  on  the  shareholders  for  any 
unpaid  portion  of  the  subscriber's  capital  stock,  and  by  application 
of  all  net  profits.  *  *  *  (This  clause  was  designed  to  prevent 
that  reduction  of  capital  stock  on  account  of  losses  which  had  been 
a  potent  source  of  evil  in  the  past.) 

(A)  No  division  of  profits  by  way  of  dividend  or  bonus  shall 
exceed  8  per  cent,  per  annum  until  the  rest  or  reserve  fund,  after 
deducting  all  bad  and  doubtful  debts,  shall  equal  20  per  cent,  of  the 
paid-up  capital  stock.  *  *  *  (An  obstacle  to  such  extravagant 
and  disastrous  divisions  by  way  of  bonus  as  characterized  the  policy 
of  the  Bank  of  Upper  Canada.) 

^  (i)  Suspension  of  payment  of  any  liabilities  as  they  accrue,  con 
tinuing  for  ninety  days,  shall  constitute  the  bank  insolvent  and 
determine  its  charter,  except  for  the  purpose  of  making  certain 
calls,  and  for  winding  up  the  business. 

0')  The  property  and  assets  of  the  bank  being  insufficient  to  pay 
its  liabilities,  the  shareholders  shall  be  liable  for  deficiency  to  the 
amount  of  their  respective  shares,  in  addition  to  any  amount  on 
those  shares  not  yet  paid  up.  This  liability  shall  be  enforced  to 
the  extent  that  the  directors  deem  necessary  to  pay  all  the  debts  of 
the  bank,  without  waiting  for  the  collection  of  debts  to  the  bank 
or  the  sale  of  its  property.  The  directors  shall  make  calls  for  not 
more  than  20  per  cent,  of  each  share  at  intervals  of  thirty  days, 
and  on  notice  given  thirty  days  prior  to  the  day  on  which  the  call 
shall  be  payable,  as  soon  as  the  suspension  shall  have  continued 
for  six  months,  the  first  call  to  be  made  within  ten  days  after  the 
expiry  of  six  months.  Shareholders  failing  to  pay  any  call  as  it 
becomes  payable  shall  forfeit  any  claim  in  the  assets  of  the  bank 
without  preventing  the  recovery  of  such  a  call,  or  of  further  calls. 
In  the  case  of  a  bank  en  commandite,  the  unlimited  liability  of  the 
principal  partners  shall  accrue  against  them  immediately,  without 
waiting  for  any  preliminary  proceedings  whatever.  *  *  *  (This 


256  The  Canadian  Banking  System,  1817-1890 

improvement  in  the  double  liability  clause,  largely  one  of  procedure, 
was  a  highly  important  reform,  the  need  for  which  had  been  well 
taught  by  the  failure  of  the  Bank  of  Upper  Canada.  Under  the 
amended  law  it  became  possible  immediately  to  enforce  the  liability 
of  shareholders,  and  promptly  to  pay  off  the  debts  of  the  banks. 
The  hardship  of  waiting  for  dividends  had  formerly  oppressed  the 
bank's  creditors;  it  was  now  justly  transferred  to  the  bank's  pro 
prietors.) 

(k)  Upon  shares  the  transfer  of  which  shall  have  been  registered 
within  a  month  of  the  bank's  suspension  of  payment,  the  liability 
of  the  transferors,  saving  their  recourse  against  the  transferees, 
shall  continue  as  if  the  shares  had  not  been  transferred.  Directors 
refusing  to  make  and  enforce  calls  or  to  concur  in  such  action,  shall 
be  guilty  of  a  misdemeanor  and  personally  liable  for  damages 
suffered  by  their  default. 

(f)  The  bank  shall  be  subject  to  any  general  winding  up  by  act 
passed  by  Parliament. 

(m)  Each  shareholder  shall  have,  whenever  shareholders'  votes 
are  taken,  one  vote  for  each  share  held  by  him  during  the  previous 
three  months.  No  person  not  a  shareholder  shall  act  as  proxy,  and 
no  bank  employe  shall  hold  proxies  or  vote  in  person  or  by  proxy. 

(n)  The  shareholders  shall  have  power  to  regulate,  by  by-law, 
matters  incident  to  the  management  and  administration  of  the  bank, 
but  the  directors  shall  not  be  less  than  five,  or  hold  in  the  aggregate 
less  than  1  per  cent,  of  the  paid-up  stock.  They  shall  be  elected 
annually  by  shareholders,  and  be  eligible  for  re-election,  and  the 
discounts  or  advances  to  any  director,  or  firm  of  wrhich  the  director 
is  a  partner,  shall  not  exceed  one-twentieth  of  the  total  discounts 
of  the  bank  at  the  same  time. 

(o)  Certified  lists  of  shareholders,  the  stock  respectively  held  by 
them,  and  their  residences,  shall  be  transmitted  to  the  Minister  of 
Finance  each  year  before  the  day  appointed  for  opening  of  Par 
liament. 

(p)  The  monthly  returns  to  the  government  of  bank's  assets  and 
liabilities  shall  be  made  according  to  an  expanded  and  improved 
form.1 

(</)  The  making  of  willfully  false  statements  in  such  returns  shall 
be  a  misdemeanor,  and  bank  officers  signing,  approving  or  concur 
ring  therein,  with  intent  to  deceive  any  person,  shall  be  responsible 
for  damages  sustained  by  him  in  consequence. 

(?•)  Giving  unfair  preference  to  any  creditor  shall  be  a  misde 
meanor  on  the  part  of  an  officer  of  the  bank. 

(«)  The  charter  of  the  bank  shall  run  to  the  end  of  the  session  of 
Parliament  next  after  the  first  of  January,  1881,  and  no  longer. 

JThe  form  of  these  returns  appears  in  Appendix  I. 


The  "Act  Respecting  Banks  and  Banking,"  1870     257 

The  directors  of  any  existing  bank  were  permitted, 
on  authority  of  the  shareholders  given  in  general 
meeting,  to  apply  for  an  extension  of  its  charter  with 
amendments  subjecting  the  bank  to  the  first  eighteen 
restrictions  outlined  above.  The  Governor-in-Council 
was  empowered,  upon  favorable  report  of  the  Minister 
of  Justice  and  the  Treasury  Board,  to  continue  the 
amended  charter,  by  letters  patent,  from  the  date 
of  its  expiry  to  the  established  date  in  1881.  The 
charter  was  to  take  effect  either  from  the  date  of  its 
expiry,  or,  the  shareholders  consenting,  from  any 
earlier  time  fixed  for  its  commencement.  If  it  were 
shown,  at  the  time  of  the  application  for  the  renewal, 
that  the  capital  stock  of  the  bank  was  impaired,  the 
Governor-in-Council  might  permit  a  reduction,  not 
to  exceed  25  per  cent,  of  the  amount  paid-up,  and 
not  to  reduce  that  amount  below  $200,000.  This 
regulation,  apparently  a  reminiscence  of  the  free 
banking  which  he  supported  twenty  years  before, 
was  a  part  of  his  policy  specially  favored  by  the 
Minister.  He  insisted  upon  it  as  essential  to  his 
banking  measures,  and  also  wished  to  provide  for 
granting  new  charters  by  letters  patent.  But  Par 
liament  would  not  consent  thus  to  strip  itself  of 
jurisdiction  in  the  matter. 

The  monopoly  of  issuing  notes  for  circulation  was  - 
assured   to   the   banks    by  imposing    on    private    or 
unauthorized  issue  a  fine  of  $400,  recoverable  with 
costs  in  any  court  having  civil  jurisdiction,  one-half 
for  the  person  bringing  suit,   and  one-half   for  the 
public  uses  of  the  Dominion.     Previous  legislation  in 
conflict  with  the  present  act  was  repealed,   and  the 
"Act  respecting  Banks"   of  1868  continued  to  the 
end  of  the  session  of  1872. 
17 


258  The  Canadian  Banking  System,  1817-1890 

§42. "THE  ACT  RELATING  TO  BANKS  AND  BANKING," 

1871 

The  account  of  Sir  Francis  Hincks'  banking  policy 
is  incomplete  without  some  reference  to  his  financial 
measures.  He  was  a  Minister  fertile  in  schemes  to 
keep  the  Treasury  full.  One  of  his  measures,  for  the 
passing  of  which  he  relied,  probably,  more  upon  a 
disciplined  majority  than  on  the  arguments  advanced 
in  its  behalf,  I  have  already  noticed  in  his  increase  of 
the  Dominion  note  circulation.  The  cognate  plan  to 
secure  the4  permanent  loan  of  one-half  the  cash  reserves 
of  the  banks  in  the  Dominion  is  also  familiar.  An 
other  device,  adopted  in  1871,  was  the  assumption  of 
the  government  savings  banks  established  in  the 
maritime  provinces  before  Confederation.  He  further 
provided  for  starting  new  offices,  and  for  converting 
savings  bank  deposits  into  five  per  cent,  debentures. 
(34  Vic.,  cap.  6.)  Postoffice  savings  banks  had  been 
provided  for  under  his  predecessors. 

The  competition  of  the  government  savings  banks 
was  a  serious  factor  in  the  general  banking  situation 
for  many  years.  The  high  interest  (4  to  4-J  per  cent.) 
paid  on  deposits,  and  the  lack  of  adequate  restriction 
on  the  amount  which  individuals  might  deposit,  di 
verted  a  considerable  part  of  the  sums  ordinarily  kept 
by  the  banks  to  the  chests  of  the  government.  Only 
in  1886  were  precautions  taken  to  correct  these  faults 
and  limit  the  banking  functions  of  the  government 
to  custody  of  the  savings  of  the  poor,  ignorant,  and 
those  unable  to  judge  for  themselves  as  to  the  security 
of  their  investments. 

By  a  third  scheme,  chartered  savings  banks  were 
now  obliged  to  reorganize  under  general  legislation, 
to  provide  a  comparatively  large  paid-up  capital,  and 


"The  Act  Relating  to  Banks  and  Banking,"  1870     259 

to  invest  it  in  government  debentures.  (33  Vic.,  cap. 
7.)  -Insurance  companies,  both  domestic  and  foreign, 
had  been  compelled  in  1868  to  maintain  deposits  with 
the  Minister  of  Finance.  All  these  measures  were 
supported  by  the  plausible  plea  of  guarding  the  pub 
lic  interest,  but  it  is  not  unlikely  that  they  served 
that  interest  as  much  by  helping  to  find  the  govern 
ment  of  the  day  with  ample  funds  as  by  protecting 
individuals  from  loss. 

The  last  item  of  the  list,  though  hardly  a  financial 
measure,  is  quite  as  germane  to  our  subject.  In  a 
statute  of  1871  (34  Vic.,  cap.  4),  provision  was  made 
for  (a)  expelling  from  the  circulation  the  large  amount 
of  American  silver  by  which  Canada  had  been  flooded 
since  the  suspension  of  specie  payments  in  the  United 
States:  (b)  substituting  therefor  the  Canadian  silver 
coinage  in  pieces  of  five,  ten,  twenty-five  and  fifty 
cents,  and  copper  coinage  in  pieces  of  one  cent,  the 
silver  being  legal  tender  to  810,  and  copper  to  twenty- 
five  cents;  and  (c)  for  establishing  throughout  Canada 
as  the  compulsory  money  of  account,  an  uniform  cur 
rency  in  the  denomination  of  dollars,  cents  and  mills, 
at  the  equivalence  of  810  Canadian =the  American 
eagle,  coined  since  1832,  and  weighing  10  dwts.,  18 
grs.  Troy,  and  84.86f  Canadian  =the  British  sover 
eign,  the  two  coins  mentioned  and  fractions  thereof  ' 
being  made  a  legal  tender  in  Canada. 

On  the  3d  March,  1871,  the  Minister  explained  to 
the  House  of  Commons  that  in  only  one  single  in 
stance  had  a  charter  been  renewed  according  to  the 
act  of  the  previous  year.  "  Banks,"  he  continued, 
"  almost  unanimously  expressed  themselves  in  favor 
of  having  Parliamentary  charters.  When  this  was 
ascertained,  and  it  was  only  quite  recently,  the  Gov- 


260  The  Canadian  Banking  System,  1817-1890 

eminent  determined  that  they  would  endeavor  to  em 
body  in  one  general  banking  Act,  not  only  the*  pro 
visions  of  the  previous  Act  of  the  last  session,  but 
also  the  general  provisions  of  wrhat  he  might  term 
•  the  internal  regulations  of  banks,  and  which  they 
themselves  seemed  desirous  should  be,  as  nearly  as 
possible,  assimilated.  This  was  the  extent  of  the 
Government's  intentions,  but  there  seemed  to  be  a 
very  general  desire  that  in  the  Bank  Act  the  charters 
should  be  extended  for  ten  years/'1 

The  act  drafted  in  accordance  with  this  purpose 
was  passed  with  very  slight  discussion  in  either  house, 
and,  on  the  14th  April,  received  the  royal  assent. 
(34  Vic.,  cap.  5.)  This  statute  was  the  first  general 
law  under  which  the  banks  really  worked,  and  may 
be  regarded  as  practically  the  first  Bank  Act  of  the 
Dominion.  Still,  the  measure  of  1870  contained  the 
essence  of  the  Government'^  policy.  We  have  to  note 
one  change  in  the  capital  requirement,  no  new  bank 
being  now  permitted  to  issue  notes  or  begin  business 
with  less  than  $500,000  capital  bond  fide  subscribed, 
and  $100,000  similarly  paid-up.  The  payment  of  a 
further  sum  of  $100,000  was  required  within  two  years 
from  the  beginning  of  business.  An  idea  of  the  com 
prehensiveness  of  the  act  may  be  gained  from  the 
titles:  General  Regulations  §  §  4  to  16,  Internal  Regu 
lations  §§17  to  29,  President  and  Directors  §§30  to 
38,  Powers  and  Obligations  of  the  Bank  (loans,  inter 
est,  advances  on  warehouse  receipts,  etc.)  §§39  to  54, 
Bank  Notes,  Bonds,  etc.  §§55  to  56,  Insolvency  §§57 
to  59,  Offences  and  Penalties  §§  60  to  67,  Notices  §  69, 
Future  Legislation  §§70  to  71,  Special  Provisions  as 

1  Parliamentary  Debates,  Canada,  vol.  ii,  p.  255. 


"The  Act  Relating  to  Banks  and  Banking,"  1870     261 

to  certain  banks  §§72  to  75,  Repealing  and  Saving 
Clauses  §§76  to  77. 

The  law  as  to  loans  on  warehouse  receipts  and 
similar  documents  was  thoroughly  revised,  difficul 
ties  of  procedure  removed,  and  some  amendments 
added.  A  considerable  advance  was  made  here  in 
the  legislation  which  allowed  banks  making  advances 
to  take,  instead  of  personal  security,  the  security  of 
commodities  stored  against  the  time  to  market  them, 
passing  into,  out  of,  or  through  Canada,  or  under 
going  conversion  from  the  raw  state  into  products  such 
as  pork,  bacon,  hams,  malt,  flour  and  sawn  lumber. 
How  important  this  possibility  was,  not  only  to  the 
development  and  maintenance  of  the  country's  trade, 
but  also  to  the  safe  conduct  of  banking,  will  appear 
as  the  careful  attention  to  the  "  warehouse  receipts" 
clauses  and  the  wide  extension  of  the  underlying 
principles,  are  noticed  in  later  pages. 

It  was  also  declared  that  the  bank  might  acquire 
and  hold  as  collateral  security  for  any  advance, 
"shares  in  the  capital  stock  of  any  other  bank,  the 
bonds  or  debentures  of  municipal  or  other  corpora 
tions,  or  Dominion,  Provincial,  British  or  foreign 
public  securities."  If  the  original  debt  were  not 
paid  when  due,  the  bank  might  dispose  of  such  col 
lateral  after  thirty  days'  notice  to  the  debtor. 

A  further  discussion  of  the  statute  is  unnecessary. 
It  would  be  tedious  to  repeat  at  length  the  substance 
of  its  seventy-seven  sections,  and  twenty-four  octavo 
pages;  to  amend  the  Minister's  description  of  its  pur 
pose  would  be  difficult.  And  in  the  end,  we  should 
have  discovered  almost  no  provision  completely  un 
familiar,  a  large  part  of  the  act  being  devoted  to  the 
re-enactment  and  consolidation  of  legislation  with 


262  The  Canadian  Banking  System,  1817-1890 

respect  to  banks  already  in  force.  Aside  from  cer 
tain  technical  amendments  in  1872,  1873,  and  1875. 
the  Bank  Act  remained  without  change  until  1879. 

The  achievement  of  first  bringing  the  Canadian 
banking  system  into  the  form  on  which  later  legis 
lators  merely  built,  has  frequently  been  ascribed  to 
Sir  Francis  Hincks.  It  is  true  that  he  proposed  cer 
tain  reforms  to  Parliament,  that  his  resolutions  were 
adopted  with  little  substantial  change,  that  the  act 
of  1871  is  still  the  basis  of  the  statute  governing 
banks  and  banking.  But  the  characteristic  pro 
visions  of  the  acts  of  1870  and  1871  did  not  originate 
with  Sir  Francis  Hincks.  One  of  the  few  features 
for  the  invention  of  which  the  Minister  tuas  responsible, 
viz.,  the  renewal  of  charters  by  letters  patent,  failed 
within  the  year;  another,  the  reduction  of  the 
minimum  capital  to  §100,000,  adopted  probably  for 
political  reasons,  was  afterwards  changed,  and  was 
never  found  to  exact  sufficient  cash  guarantee  of  in 
tention  to  carry  out  a  bond  fide  business;  a  third,  the 
power  to  loan  upon  stock  of  other  banks,  was  proved 
pernicious  in  less  than  three  years,  and  was  repealed 
in  less  than  eight.  The  bank  reforms  of  practical 
value  which  he  introduced,  had  all  been  suggested 
and  justified  by  bankers,  investors  in  banks,  and 
business  men,  some  one,  some  two,  and  some  eleven 
years  before  they  were  adopted  by  the  Government. 
To  unify  the  banking  system,  the  Minister  extended 
the  law  of  old  Canada  to  the  provinces  of  Nova 
Scotia  and  New  Brunswick;  to  reform  it,  he  fol 
lowed,  not  original  schemes  of  his  own,  but  the  sug 
gestions  of  the  bankers  called  in  consultation.  Yet 
the  banking  policy  of  their  successor  formed  a  dis 
tinguished  and  admirable  contrast  to  Mr.  Gait's  in- 


"The  Act  Relating  to  Banks  and  Banking,"  1870     263 

jurious  attempt  to  establish  a  currency  of  govern 
ment  paper,  and  to  Mr.  Rose's  effort  to  revolutionize 
the  system  of  bank  note  issue.  They  wished  to  re 
model  it  according  to  personal  hobbies;  he  allowed 
the  Canadian  banking  system  to  keep  to  the  natural 
lines  of  its  growth.  Of  the  wisdom  of  his  decision, 
each  year  of  the  twenty-three  since  elapsed  has 
afforded  new  and  stronger  proof. 


CHAPTER  VIII 

BANKING  UNDER  THE  CONFEDERATION, 

1867-1889 

§43. THE  EXPANSION  BETWEEN  1867  AND  1873 

THE  economic  history  of  Canada  since  the  Confed 
eration  of  the  provinces  presents  several  well-defined 
periods,  of  which  the  first  includes  1868-1873,  the 
second  1874-1879,  and  the  third  extends  from  the 
autumn  of  1879  to  nearly  the  close  of  1883.  The 
most  interesting  of  the  three,  probably,  is  the  first, 
but  even  a  cursory  description  would  need  the  whole 
of  a  separate  paper ;  to  mention  a  few  of  the  phe 
nomena,  and  some  of  the  general  results,  is  all  that 
respect  for  the  limits  of  the  present  essay  will  per 
mit.1  The  period  was  one  of  growth,  great  apparent 
prosperity  and  general  expansion.  Thus,  the  total 
debt  of  the  Dominion  was  increased  from  $93,000,000, 
in  1867  to  $141,000,000  on  the  30th  June  1874  ;  the 
net  interest  charge  rose  from  $4,300,000  to  $5,100,000. 
The  receipts  of  the  Treasury  rose  from  $13,600,000  to 
$24,200,000,  and  the  expenditure  in  similar  ratio.  Fif 
teen  and  a-half  millions  of  dollars  were  spent  upon  the 
Intercolonial  Railway,  one  million  and  a-half  on  the 
canals,  a  million  on  the  Canadian  Pacific  Railway. 

llt  might  well  be  desired  that  some  account  of  the  commercial 
growth  and  economic  development  of  British  North  America  were 
available.  A  most  careful  search  has  revealed  no  such  work,  and 
it  is  impossible  to  refer  the  reader  to  a  convenient  and  full  discus 
sion  of  questions  which  can  barely  be  touched  here. 


The  Expansion  between  1867  and  1873  265 

Twelve  millions  of  the  debt  increase  were  in  Dominion 
notes,  the  circulation  of  which  was  quadrupled  from 
1867  to  1874.  The  total  exports  of  the  country, 
$57,000,000  in  1868,  were  $89,000,000  in  1874  ;  the 
imports,  $73,000,000  in  1868,  were  $128,000,000  in 
1873-4.  Extension  of  the  railway  system  was  begun 
in  1871  ;  by  1875  the  mileage  was  doubled,  being 
4,826  miles  as  against  2,497  in  1870.  The  figures 
serve  to  indicate  what  other  evidence  proves  to  have 
been  true. 

There  was  heavy  immigration  into  the  country. 
The  area  of  settlement  was  extended.  In  the  west, 
the  new  province  of  Manitoba  was  established.  The 
supply  of  agricultural  produce  was  much  increased, 
and  a  powerful  impetus  given  to  the  business  in  pro 
duce.  Building  operations  in  Canada  and  the  United 
States,  and  the  rapid  additions  to  the  railway  system 
in  both  countries,  raised  the  price  of  lumber.  With 
the  increase  of  other  foreign  demands,  they  stimu 
lated  the  timber  trade,  and  caused  abnormal  inflation. 
The  speculation  extended  to  timbered  lands  and  tim 
ber  limits.  All  sorts  of  manufacture  were  pushed  to 
bounds,  which,  in  1875,  were  acknowledged  to  have 
been  unreasonable.1  Municipalities  of  every  grade 
caught  the  infection  and  adopted  the  pernicious 
system  of  granting  bonuses  to  manufacturing  com 
panies  proposing  to  establish  themselves  in  the  dis 
trict  of  the  grantors.  The  whole  series  of  years  was 
marked  by  general  growth  of  commercial  operations, 
expansion  of  credit  in  its  various  forms,  and  large 

lThe  Monetary  Times,  the  contemporary  newspapers,  other  finan 
cial  and  monetary  publications,  and  the  statistics  prepared  for  the 
Dominion  government,  are  the  chief  sources  for  the  facts  of  this 
period. 


266  The  Canadian  Banking  System,  1817-1890 

additions  to  the  class  of  small  shop-keepers  doing 
business  on  long  time.  Except  where  related  to 
timber  production,  the  values  of  real  estate  were 
much  less  affected  by  the  upward  movement  than 
other  investments.  The  time  is  best  described  as 
one  of  increased  activity  in  manufacture,  transpor 
tation  and  exchange.  The  great  land  boom  had 
occurred  in  1857  and  preceding  years. 

The  banks,  it  may  be  expected,  shared  in  this  ex 
pansion.  From  May,  1868,  to  June,  1874,  twenty- 
eight  new  charters  were  granted  by  the  Dominion 
Parliament,  the  record  for  each  session  being  as  fol 
lows:  1868one,  1869  two,  1871  four,  1872 ten,  1873  nine, 
1874  two.1  After  1870  the  charters  usually  provided 
that  if  $100,000  of  the  new  bank's  capital  were  not 
paid  into  some  existing  chartered  bank  and  the  fact 
certified  to  within  one  year  from  the  date  of  incorpo 
ration,  the  charter  should  be  forfeited  for  non-user. 
Provisions  as  to  the  payment  of  an  additional  $100,- 
000  varied,  the  term  being  fixed  at  from  one  to  three 
years  after  the  beginning  of  business.  In  four  cases 
the  time  for  commencing  operations  was  extended  to 
the  end  of  the  second  year.  The  work  of  founding 
a  bank  was  by  no  means  finished  by  the  passing  of 
the  act  of  incorporation,  and  some  of  the  charters 
were  forfeited.  Nevertheless,  nineteen  new  banks 
came  into  existence  and  entered  the  competition  for 
Canadian  business  before  the  end  of  1874,  but  only 
nine  of  these  were  making  returns  to  the  government 
by  the  end  of  June,  1873.  The  Commercial  Bank  of 
New  Brunswick,  the  Commercial  Bank  of  Canada, 
the  Gore  Bank  and  the  Merchants'  Bank  (acting  under 
a  Nova  Scotian  charter  in  1867),  whose  combined 

aSee  note  1,  next  page. 


The  Expansion  betiveen  1867  and  1873  267 

capital  in  1867  was  a  little  over  $6,100,000,  had  dis 
appeared  from  the  return.     So  the  total  number  of 

1These  were  as  follows: 

Site  of  Principal  Act  of 

Office  Incorporation 

1868  Bank  of  Agriculture  a . .  .Hamilton,  Ont.  31  Vic.,  cap.  85 

1869  The  Merchants'  Bank  of 

Halifax Halifax,  N.  S.  32-33    "  "     59 

"    The  Dominion  Bank Toronto,  Ont.  32-33    "  "     60 

1871  The  Metropolitan  Bank. Montreal,  Que.  34         "  "    39 
"     The     Bedford     District 

Bank1 Waterloo,  Que.  34         "  "    40 

"    The  Western  Bank1 Yarmouth,  N.  S.  34         "  «    41 

"    The  Bank  of  Liverpool. ..Liverpool,  N.  S.  34         "  "    42 

1872  The  Exchange  Bank  of 

Canada Montreal,  Que.  35  "  "  40 

"  Banque  Ville  Marie Montreal,  Que.  35  "  "  51 

"  The  St.  Lawrence  Bank. Toronto,  Ont.  35  "  "  52 

"  The  Bank  of  Hamilton..  Hamilton,  Ont.  35  "  "  42 

"  The  Halifax  Banking  Co. Halifax,  N.  S.  35  "  i(  54 

"  The  Bank  of  Acadia Liverpool,  N.  S.  35  "  "  55 

"  The  Bank  of  St.  John1.. St.  John,  N.  B.  35  "  u  56 
"  The  Maritime  Bank  of 

theDomin'nof  Canada. St.  John,  N.  B.  35  "  "  58 
"  The  Superior  Bank  of 

Canada Toronto,  Ont.  35  "  "  59 

"  The  Bank  of  Manitoba1.  Fort  Garry,  Man.  35  "  "  60 

1873  La  Banque  d'Hochelaga. Montreal,  Que.  36  '•  "     13 
"     The  Three  Rivers  Bank1.  Three  Rivers,  Que.  36  "  "    14 
"     La  Ban quede  Saint  Jean. St.  Johns,  Que.  36  "  "     15 

"     The  Stadacona  Bank Stadacona,  Que.  36  "  "     73 

"    The  Imperial  Bank Toronto,  Ont.  36  "  "     74 

"     The    Victoria    Bank   of 

Canada1 Montreal,  Que.  36  "  " 

"     Pictou  Bank Pictou,  N.  S.  36  "  " 

"     La  Banque  de  St.    Hya- 

cinthe St.  Hyacinthe,  Que.  36  "  "    77 

"     The    Central     Bank    of 

Canada1 Montreal,  Que.  36  "  "78 

1874  The  London  and  Canada 

Bank1 Toronto,  Ont.  37  "  "    55 

"     The  Bank  of  Ottawa Ottawa,  Ont.  37  "  "     56 

1  Charter  forfeited  for  non-user. 


268 


The  Canadian  Banking  System,  1817-1890 


banks  in  the  four  provinces,  acting  under  charter, 
appeared  in  the  Bank  Statement  for  June,  1873,  as 
thirty-three,  a  net  increase  of  five  since  June,  1867. 
The  totals  of  the  various  items  included  in  the 
return  were  as  follows: 


LIABILITIES 

30th  June,  1867 

30th  June,  1873 

28 

33 
$64,766,666 
55,102,959 
24,956,046 
,1,807,404 

2,496,969 

7,261,273 
31,074,316 

4,451,017 
25,890,531 
349,821 

$32,500,162 
10,102,439 

2,984,344 
14,935,213 
16,727,378 

Promi^sorv  notes  in  circulation      .  . 

Due  to  other  banks  in  Canada  ) 
Due  to  other  banks  or  agents  not  in  >- 
Canada                                           ) 

Government    deposits    payable  on  de-  ) 
mand  l  \- 

Other  deposits  payable  on  demand  ) 

Government     deposits     payable    after  ) 
notice2                    r 

Other  deposits  payable  after  notice  ) 

Totcil  liabilities  to  the  Dublic 

$44,548,376 

$98,296,677 

ASSETS  : 


1867 


Specie 

Provincial  or  Dominion  notes 

Notes  of  and  cheques  on  other  banks 

Balances    due    from    other    banks    in"! 

Canada I 

Balances    due    from    other    banks    or  [ 

agents  not  in  Canada }   \ 

Government  debentures  or  stock j 

Loans  to  the  Government | 

Loans,  etc.,  to  corporations j 

Notes  and  bills  discounted  and  current. . .  | 
Notes  and  overdue    debts    not  specially  j 

secured  | 

Overdue  debts  secured \ 

Real  estate  other  than  bank  premises. . 

Bank  premises 

Other  assets  not  included  above I 


$8,200,229 
1,806,052 


1873 


5,345,372 
6,277,593 


$6,829,226 
8,353,290 
4,571,650 

3,095,220 


11,879,044 
1,324,761 
107,869 
2,431,710 
54,899,142  I  121,977,754 

!      1,242,897 

!      1,298,356 

934,841 


1,628,249  ' 


Total  assets $80,772,834 


2,186,780 


$168,519,746 


1  This  item  in  1867  is  classed  as  '•  Deposits  not  bearing  interest." 

2  In  1867,  "  Deposits  bearing  interest." 

3  Owing  to  incompleteness  in  the  return  of  the  assets  of  one  of  the  Nova 
Scotia  banks,  the  figures  under  this  head  for  1867  are  approximate  merely. 


The  Expansion  between  1867  and  1873  269 

About  $364,000  of  the  Gore  Bank's  capital  was 
written  off  when  it  disappeared  from  business,  and 
two-thirds  of  the  capital  of  the  Commercial  Bank.  If 
this  is  added  to  the  capital  of  the  Commercial  Bank 
of  New  Brunswick,  the  sum  of  $3,630,666  is  obtained  as 
the  gross  reduction  of  banking  capital  between  1867 
and  1873.  The  gross  increase,  therefore,  will  be  $55,- 
102,959  paid-up  capital  on  the  30th  June,  1873,  less 
$32,500,162,  the  like  total  in  1867,  plus  $3,630,666,  or 
$26,233,463,  an  increase  of  ov^er80.71  per  cent.  More 
than  fifteen  million  dollars  of  this  increase  were  con 
tributed  by  the  shareholders  of  the  Bank  of  Mon 
treal,  the  Merchants'  Bank  of  Canada,  and  the  Cana 
dian  Bank  of  Commerce,  in  nearly  equal  proportions. 
The  remaining  eleven  millions  were  added  to  the  cap 
itals  of  twenty  other  banks,  in  amounts  ranging  from 
$70,000  to  $1,130,000.  The  increases  of  over  a  mil 
lion  dollars  were  those  of  the  Royal  Canadian  Bank 
and  the  Union  Bank,  while  the  Quebec  Bank,  Mol- 
sons'  Bank,  Bank  of  Toronto,  Ontario  Bank,  Baiique 
Nationale,  Banque  Jacques  Cartier,  Merchants'  Bank 
of  Halifax,  and  the  Bank  of  New  Brunswick  each 
added  $400,000  or  more  to  its  stock. 

The  competition  between  the  ambitious  and  enter 
prising  gentlemen  who  guarded  the  three  larger 
banks,  Mr.  E.  H.  King,  Sir  Hugh  Allan,  and  the 
Hon.  William  McMaster,  respectively,  did  not  end 
before  the  capital  of  the  Bank  of  Montreal  was 
brought  to  an  even  $12,000,000,  that  of  the  Mer 
chants'  to  $9,000,000,'  and  that  of  the  Bank  of  Com 
merce  to  $6,000,000.  Even  then  they  strove  each  to 
accumulate  the  larger  rest.  The  Bank  of  Montreal, 

1  $498,950  of  this  were  not  paid  up.  The  capital  of  the  bank  has 
since  been  reduced  and  is  now  $6, 000 ,000. 


270          The  Canadian  Banking  System,  1817-1890 

however,  had  at  the  start  an  advantage  of  almost 
six  millions  more  capital,  and  the  management  of 
the  government  account;  it  was  never  overtaken, 
much  less  outstripped,  by  its  rivals. 

Naturally,  with  so  many  banks  yet  to  be  opened, 
the  increase  of  capital  did  not  stop  with  the  date  in 
1873  at  which  I  have  chosen  to  consider  it.  Nearly 
the  highest  point  reached  between  1870  and  1890,  was 
in  June,  1876,  when  the  official  return  for  forty-one 
banks  showed  the  total  paid-up  capital  to  be  $67.199,- 
051. l  The  most  of  this  extension  was  undoubtedly 
genuine.  Yet  banks  were  empowered  by  the  act  of 
1871  to  loan  upon  shares  of  the  capital  of  other  char 
tered  banks.  On  December  31,  1873,  $3,800,000  of 
loans  were  secured  by  such  shares,  the  aggregate  of 
banking  capital  then  being  almost  sixty  million  dol 
lars;  on  the  same  date  of  1875,  $5,300,000  of  loans 
on  bank  shares  were  current,  total  capital  being 
then  sixty-three  million  dollars.  To  the  extent  of 
such  loans,  and  of  a  good  part  of  the  loans  granted 
by  the  several  banks  to  their  own  stockholders  (an 
item,  however,  which  does  not  appear  in  the  return), 
these  additions  to  capital  were  practically  fictitious. 
And  to  that  extent,  too,  the  banks  were  trading  on 
fictitious  capital,  a  practice  the  faults  of  which  are 
too  obvious  to  require  explanation.  Speculation  in 
bank  stock  was  promoted,  a  large  business  on  mar 
gins  developed,  and,  in  the  end,  widespread  and 
heavy  losses  caused  among  the  participants. 

But  from  the  mass  of  evidence  examined,  I  cannot 
conclude  that  a  greater  part  in  furthering  the  expan 
sion  of  the  period  must  be  attributed  to  the  banks 
than  to  any  other  important  members  of  the  organi- 

1  Statistical  Year  Book  of  Canada,  1892,  p.  516. 


The  Expansion  between  1867  and  1873  271 

zation  of  production  and  exchange.  The  commerce 
of  Canada  was  under  the  influence  of  much  the  same 
tendencies  as  were  acting  throughout  the  civilized 
world;  the  returns  show  that  the  banks  followed 
rather  than  stimulated  the  upward  movement.  The 
number  and  extent  of  the  simpler  exchanges  in 
creased  by  reason  of  the  growth  of  population,  higher 
wages,  and  greater  activity  in  retail  trade.  The 
bank  note  circulation,  wherewith  they  were  affected, 
also  rose,  as  our  comparison  shows,  from  $10,100,000 
to  824,900,000  on  the  30th  June,  1873.  Six  months 
later  it  was  $29,016,659.  The  new  commercial  en 
terprises,  the  greater  operations  in  produce,  the  pro 
cesses  of  railway  construction,  and  the  swollen  vol 
ume  of  general  business,  caused  a  new  demand  for 
loanable  capital.  The  rate  of  interest  rose.  The 
banks  supplied  the  need  by  expanding  their  discounts 
and  other  Canadian  loans  from  some  $54,000,000  in 
June,  1867,  to  $127,000,000  in  June,  1863,  and  $157,- 
000,000  on  the  31st  December,  1874,  an  increase  be 
tween  the  extreme  dates  of  $103,000,000.  Only 
$18,000,000  of  this  was  derived  from  circulation;  the 
remainder  from  additions  to  capital,  amounting  to 
$31,000,000  and  an  increase  of  deposits  of  all  sorts 
amounting  to  $54.000,000.  For  a  more  extended  sta 
tistical  comparison,  there  is  no  present  opportunity, 
but  the  figures  already  quoted  will  suggest  the  con 
clusion  which  such  a  comparison  would  establish, 
viz.:  that  the  extension  of  banking  was  not  out  of 
proportion  to  the  growth  of  export  and  import  trade, 
or  to  the  development  of  the  internal  commerce  of 
Canada,  and  the  means  of  conducting  it,  or  to  the 
apparent  increase  of  accumulation,  as  indicated  by 
the  total  deposits  in  the  chartered  banks. 


272  The  Canadian  Banking  System,  1817-1890 

g  44— DEPRESSION,  1874-1879 

That  the  growth  exhibited  in  the  preceding  section 
was  accomplished  without  loss  or  cost  to  the  banks, 
is  an  inference,  probably,  that  no  one  will  make.  Yet 
no  panic,  in  the  accepted  sense  of  the  term,  occurred 
in  Canada  in  1873,  nor  is  it  easy  to  discover  the  phe 
nomenon  designated  by  the  broader  expression  "  com 
mercial  crisis."  Relaxation  from  the  tense  activity 
of  the  preceding  period  began  in  the  fall  of  1873,  and 
continued  through  1874.  Thus  the  change  was  grad 
ual,  though  none  the  less  complete  for  that.  Before, 
however,  the  effect  upon  the  banks  is  discussed,  a  di 
gression  to  certain  losses  of  an  earlier  date  may  be 
allowed. 

By  the  amalgamation  of  the  old  Commercial  Bank 
with  the  Merchants'  Bank  of  Canada,  the  sharehold 
ers  of  the  former  received  about  one-third  of  the  par 
value  of  their  paid-up  capital.  Another  of  the  old 
Upper  Canada  corporations  was  the  Gore  Bank,  es 
tablished  in  Hamilton  in  1833.  At  the  time  of  its 
failure,  the  Bank  of  Upper  Canada  had  charge  of  the 
Montreal  account  of  the  Gore  Bank,  and  owed  it  about 
$78,000.  The  bank  was  embarrassed  in  the  next  year 
by  the  failure  of  the  Commercial  Bank,  to  which  the 
Montreal  account  had  been  transferred.  Then  a  com 
mittee  of  stockholders  reported  that  three  of  the  agen 
cies  should  be  closed,  that  another  was  loaded  with 
bad  debts,  and  that  its  funds  had  been  misapplied  by 
the  manager.  The  system  of  inspecting  the  agencies 
was  neither  efficient  nor  regular.  The  staff  was 
needlessly  large.  Heavy  losses  incurred  long  pre 
viously  (principally  after  the  collapse  of  1857),  had 
never  been  written  off.  The  deposits  of  the  city  of 
Hamilton  were  withdrawn,  and  though  they  were 


Depression,  1874-1879  273 

afterwards  restored,  the  action  injured  the  bank. 
The  fears  of  the  public  were  aroused,  and  a  heavy 
drain  started  upon  the  bank's  liabilities.  Between 
June,  1867,  and  June,  1868,  its  deposits  were  reduced 
by  $760,000,  its  circulation  by  over  $330,000.  The 
price  of  stock  in  the  Gore  Bank,  which  stood  at  92| 
in  October,  1867,  fell  to  80  in  December,  70  in  April, 
60  in  May,  50  in  June,  and  in  October,  1868,  to 
30  and  35.  The  Bank  of  Montreal  temporarily  ad 
vanced  $150,000  to  help,  'and  other  Ontario  banks 
some  $200,000.  This  enabled  the  Gore  Bank  to 
keep  on.  In  June,  1869,  the  reduction  of  its  stock 
in  the  ratio  of  40  to  24  was  authorized  by  Parliament. 
(32  and  33  Vic.,  cap.  54.)  The  bank  was  still  solvent, 
but  rather  than  continue  the  struggle  alone,  the  share 
holders  decided  to  accept  for  their  paid-up  stock  in 
the  Gore  Bank  fifty-five  cents  on  the  dollar  in  shares 
of  the  Bank  of  Commerce,  then  worth  1054.  On  the 
27th  August,  its  debts  and  property  were  taken  over 
by  the  Canadian  Bank  of  Commerce.  The  old  bank 
was  amalgamated  with  the  new,  and  the  sole  survivor 
of  the  banks  chartered  by  Upper  Canada,  apparently 
doomed  to  perish  like  the  others,  lost  its  identity  and 
separate  existence.1 

Of  the  Commercial  Bank  of  New  Brunswick,  which 
suspended  payment  on  the  10th  November,  1868,  no 
more  need  be  said  than  that  its  noteholders,  deposit 
ors,  and  other  creditors  were  paid  in  full,  and  a  divi 
dend  saved  for  the  shareholders.  The  Westmoreland 
Bank,  another  New  Brunswick  concern  which  failed 
about  the  time  of  Confederation,  was  also  creditably 

^Monetary  Times  and  Insurance  Chronicle,  vol.   ii,   pp.    162,    167, 
398,  468,  525,  867;  vol.  iii,  p.  36. 

18 


274  The  Canadian  Banking  System,  1817-1890 

wound  up,  the   double  liability  of  the  shareholders 
being  successfully  enforced. 

In  1871  the  Bank  of  Liverpoool,  situated  at  Liver 
pool,  N.  S.,  was  chartered  by  the  Dominion  Parlia 
ment,  and  in  the  following  year  the  Bank  of  Acadia, 
located  in  the  same  town.  (34  Vic.,  cap.  42;  35  Vic., 
cap.  55.)  Both  concerns  were  involved  with  a  Boston 
firm  of  rather  doubtful  credit.  The  Americans  had 
taken  one-fourth  of  the  Liverpool's  stock,  and  one- 
eighth  of  the  Acadia's,  and  paid  for  it  by  promissory 
notes.1  In  connection  with  lumbermen  and  ship  own 
ers  of  Liverpool,  they  got  some  advances  by  a  system 
of  mutual  indorsement,  and  other  credits  011  bills  of 
exchange  drawn  on  the  American  house  and  supposed 
to  be  covered  by  lumber  shipments,  but  met  really  by 
the  proceeds  of  similar  new  bills.  The  funds  thus 
obtained  were  used  to  increase  the  lumber  plant  of 
the  ring,  rather  than  to  discharge  their  debts,  or  to 
pay  for  the  quantities  of  merchandise  purchased  in 
Montreal,  Boston  and  Halifax.  Liverpool  and  the 
surrounding  country  enjoyed  a  season  of  high  pros 
perity.  But  early  in  1873,  acceptances  of  the  Amer 
ican  house  went  to  protest,  the  principal  Liverpool 
firm  succumbed,  and  with  it  dragged  down  the  banks. 
The  Liverpool  failed  on  the  llth  April,  the  Acadia, 
after  a  business  life  of  four  months,  on  the  18th. 
Dun,  Wimaii  &  Co.  reported  failures  for  liabilities  of 
$3,000,000  in  Nova  Scotia  during  1873,  and  the  pros 
pect  that  creditors  would  get  30  to  33  per  cent,  of 
their  claims.  One-third  of  the  amount  involved  was 
owed  by  parties  in  the  neighborhood  of  Liverpool.2 

1  Monetary  Times  and  Insurance  Chronicle,  vol.  vi,  p.  915;  vol.  vii, 
p.  222. 
2 Ibid,  vol.  ix,  p.  549. 


Depression,  1874-1879  275 

There  the  pinch  was  severe,  and  the  losses,  compared 
to  the  resources  of  the  community,  heavy.  The  Bank 
of  Liverpool  ultimately  resumed;  the  Bank  of  Acadia 
never  resumed  and  paid  almost  none  of  its  debts. 
But  its  total  liabilities  at  the  time  of  suspension  were 
only  8106,914,  and  the  loss  directly  due  to  this  bank 
failure  was  slight. 

Reverting    now    to    the    more    general   aspects  of 
Canadian    banking,    we    have    to    observe,    in    the 
summer  of  1872,  a  slight  stringency   in  the   money 
market,   and  the   rise   of  the   rate  of  discount  to  10 
per  cent.     Discounts,  however,  increased,  as  indeed 
they  continued   to  increase,  until  the   end   of  1874. 
The  addition  was  doubtless  partly  due  to  the  specu 
lative  efforts  of  traders  in  wool,  produce,  lumber  and 
timber,  to  hold  the  stocks  they  had  bought  for  a  rise, 
or  manufactured  in  hope  of  large  profits.     A  subse 
quent  increase  of  loans  on  bank  stock  is  similarly  to 
be  explained.     In  the  early  months  of  1873  activity 
still  prevailed  in  all  directions.     But  by  March  the 
banks,  in  spite  of  advancing  prices,  began  the  policy 
of  restricting  discounts.     In   May,  the  large  Ameri 
can  lumber  company  of   Dodge  &  Company  failed. 
Its  connections  with  Canadian  houses  were  close  and 
many,  and  numbers  of  operators  in  timber  and  sawn 
lumber  were  forced  to  the  wall.     The  deep  depression 
in  products  of  the  Canadian  forests  dates  from  this 
point.     Then  came  the   American   crisis.     But   con 
fidence  in  the  banks  was  strong.     It  was  strengthened 
by  full  explanation  as  to  their  escape  from  losses  in 
the  States.     The  condition  of  Canadian  producers  was 
improved   by   the    higher   grain    prices,   due   to   the 
scarcity  in  England.     And,  except   for   a   slight   but 
rapid  decline  in  bank   stocks   in  September,   and    a 


276  The  Canadian  Banking  System,  1817-1890 

small  run  on  two  or  three  of  the  banks,  no  critical 
features  appeared  in  the  situation,  and  the  country 
escaped  the  evils  of  a  banking  panic. 

During  the  next  year  the  banks  enforced  the  re 
strictive  policy  with  what  strength  they  could.  The 
absolute  increase  in  their  total  advances  was  due  in 
a  measure  to  the  necessity  of  supporting  the  opera 
tions  of  many  of  their  debtors  until  the  assets  of 
these  parties  could  be  better  realized.  The  real 
stringency  did  not  occur  until  January  to  March, 
1875.  In  these  three  months,  the  deposits  of  banks 
in  Ontario  and  Quebec  were  reduced  by  $8,500,000 
to  $70,800,000,  and  their  circulation  by  $3,900,000  to 
$21,500,000.  They  met  this  drain  of  $12,500,000  by 
drawing  on  English  correspondents  for  $2,300,000, 
calling  in  funds,  chiefly  from  the  United  States,  for 
$2,500,000,  reducing  their  outstanding  loans  by 
$2,300,000,  and  by  parting  with  cash  to  the  net 
amount  of  $1,700,000.  New  stock  for  $1,300,000 
was  paid  up  during  the  period,  and  the  liabilities  of 
the  larger  to  the  smaller  banks,  for  whom  they  were 
agents,  increased  by  $1,800,000.  A  test  no  less 
severe  was  stood  by  the  banks  in  1893,  and,  as  in 
1875,  passed  without  exciting  the  public  or  precipitat 
ing  bank  suspensions. 

Of  commercial  failures,  on  the  other  hand,  the 
record  for  1875  shows  an  enormous  increase,  1,968 
as  against  966  in  1874,  and  994  in  1873,  and  for 
liabilities  of  $28,843,967,  as  against  $7,696,765,  and 
$12,334,191,  in  the  two  preceding  years.  The  record 
for  1876-78  is  nearly  as  bad,  but  hardly  suggests  the 
full  severity  of  the  hard  times  through  which  the 
people  of  the  Dominion  were  passing.1  In  the  winter 
Note  1,  next  page. 


Depression,  1874-1879  277 

of  1876,  the  depression  reached  what  was,  probably, 
the  lowest  depths.  The  carrying  trade  between  for 
eign  ports  had  fallen  off,  and  the  ships  had  been 
brought  home  to  compete  with  coasting  vessels  for 
the  diminished  volume  of  Canadian  trade.  The 
lumber  and  timber  trade  was  suffering  from  lessened 
demand  in  England  and  the  United  States,  from  re 
duced  prices,  and  from  the  increased  competition  of 
the  products  of  Michigan  and  Wisconsin  forests. 
Stagnation  in  the  lumber  trade  left  many  of  the 
laborers  usually  employed  in  it  without  work. 
Farmers  and  others  who  supplied  them  were  affected, 
and  in  great  sections  of  the  country,  dependent  for 
prosperity  on  the  lumber  business,  the  stimulus  to 
active  industry  was  withdrawn. 

The  long  credits,  easily  obtained  from  English 
houses,  had  induced  persons  to  enter  the  wholesale 
business,  ill-equipped  either  with  capital  or  experi 
ence.  Imports  were  purchased  in  excess  of  the  actual 
needs  of  the  country.  To  get  rid  of  them,  long  credits 
were  granted  in  turn  to  retailers.  The  wealth  of  the 


follo\ving  is  Dun,  Wiman  &  Co.'s  list  of  failures  in  Canada 
for  the  years  in  question: 

YEAR  Failures      I    Liabilities 


1879 

634 

$11,648,697 
23,152,262 
25,510,147 
25,517,991 
28,843,967 
7,696,765 
12,334,191 

1878  

1615 

1877  

1890 

1876  

.  »•  .    1728 

1875  

]  968 

1874 

966 

1873 

994 

9795         |  $134,704,000 


Monetary  Times,  vol.  xii,  p.  1303. 


278  The  Canadian  Banking  System,  18]  7-1890 

country  had  increased  at  best  not  more  than  five  per 
cent,  per  annum,  but  imports  more  than  thirteen  per 
cent.  The  conclusion  from  this  and  the  annual  dif 
ference  between  the  exports  and  imports,  was  that 
the  country  had  bought  in  excess  of  its  power  to  pay. 
The  annual  interest  charge  upon  the  foreign  mercan 
tile  debt  alone,  then  about  $78,000,000,  was  $4,000.- 
000.  Added  to  this  were  payments  upon  railway, 
Dominion,  provincial  and  agricultural  debts  held 
abroad,  a  total  burden  that  served  sorely  to  intensify 
that  mercantile  distress  for  which  the  system  of  long 
credits  was  largely  responsible. 

Ship-building  and  agriculture  felt  the  troubles  in 
less  degree  ;  like  the  agricultural  implement  indus 
try,  they  were  comparatively  prosperous.  Iron 
manufacturers  lost  by  stoppage  of  the  railway  enter 
prise,  and  coal,  cotton,  salt  and  slate  industries  were 
all  more  or  less  depressed,  the  shrinkage  in  their 
business  being  proportionate  to  that  in  other  lines.1 

After  their  experience  early  in  1875,  the  banks  had 
the  disagreeable  task  of  appraising  their  mistakes, 
and  reckoning  their  losses  in  the  "  era  of  remarkable 
prosperity"  which  had  been  brought  to  a  close. 
Certain  items  of  their  assets  underwent  striking 
changes.  "  Notes  and  debts  overdue,  and  not 
specially  secured,"  rose  from  $1,141,410  on  the  31st 
December,  1872,  to  $4,436,636  at  the  end  of  1875. 
"  Overdue  debts,  secured  by  mortgage  or  other  deed 
on  real  estate,  or  by  deposit  of,  or  lien  on  stock,  or 
by  other  securities,"  rose  from  $1,455,385,  in  Decem- 

1  "Report  of  the  Select  Committee  on  the  Causes  of  the  Present 
Depression  of  the  Manufacturing,  Mining,  Commercial,  Shipping, 
Lumber,  and  Fishing  Interests,"  printed  by  order  of  Parliament, 
Ottawa,  1876,  sections  3  to  15. 


Bank  Failures  and  Losses,  1874-1879  279 

ber,  1873,  to  $4,057,591  in  December,  1877,  while 
"real  estate  (other  than  bank  premises)"  increased 
from  $586,996  in  1873,  to  $2,383,454  at  the  close  of 
1879.  "Notes  and  bills  discounted  and  current,"  on 
the  other  hand,  fell  from  $139,379,457  in  December, 
1874,  to  $97,603,688  in  December,  1879;  circulation 
from  $28,465,192  to  $22,352,761,  and  all  classes  of 
deposits  from  $85,600,000  to  $79,370,000.  The 
reduction  of  deposits,  it  will  be  observed,  was  com 
paratively  slight,  the  reason,  of  course,  being  that 
in  hard  times  idle  money  is  placed  with  more  atten 
tion  to  the  safety  than  the  profit  of  the  investment. 
The  last  change  to  be  noted  is  that  in  paid-up  capital. 
The  item  stood  at  $66,800,225  on  31st  December, 
1875  ;  four  years  later  it  had  fallen  to  $60,351,505, 
within  $700,000  of  the  lowest  point  reached  after 
1874.  All  these  changes,  however,  are  better  studied 
from  the  table  given  in  the  Appendix  I. 


§  45. — BANK  FAILURES  AND  LOSSES,   1874-1879 

The  reduction  in  the  banking  capital  of  the  country 
was  effected  in  four  ways  :  I — the  reduction  of  cap 
ital  stock  by  resolution  of  the  shareholders  of  the 

bank  under  authority  granted  by  Parliament ;  II 

the  amalgamation  of  banks  according  to  special  act 
of  Parliament,  and  reorganization  on  a  reduced  cap 
italization  ;  III — voluntary  liquidation  and  retire 
ment  from  business  ;  IV — and  compulsory  winding 
up. 

I.  (a)  The  capital  of  La  Banque  Jacques  Cartier 
was  successively  reduced  from  $2,000,000  to  $1,000,- 
000  in  1877,  and  from  $1,000,000  to  $500,000  in  1879. 
(40  Vic.,  cap.  55;  42  Vic.,  cap.  54.)  The  policy  of 


280  The  Canadian  Banking  System,  1817-1890 

the  bank  in  the  preceding,  period  was  described  as 
enterprising  and  aggressive.  It  had  no  branches,  and 
the  losses  were  due  to  the  poor  management  by  which 
many  ill-advised  loans  became  lock-ups.  The  cashier 
was  afterwards  convicted  for  falsifying  returns. 

(b)  The  president  and  general  manager  of  the  Mer 
chants'  Bank  of  Canada  resigned  in  February,  1877. 
A  new  manager  took  hold  of  the  bank  in  March.  At 
his  suggestion  the  stockholders  secured  authority  in 
1878  to  reduce  its  stock  in  the  ratio  of  three  to  two. 
The  reasons  assigned  for  the  reduction  were  bad  and 
doubtful  debts  previously  unprovided  for,  losses  in 
the  New  York  office  by  gold  transactions  in  a  falling 
market,  the  reduced  market  value  of  the  Detroit  and 
Milwaukee  bonds  purchased  at  the  time  of  the  Com 
mercial  failure,  expenses  and  losses  incurred  in  dis 
posing  of  certain  Quebec  securities,  and  provision  for 
contingencies  likely  to  arise  in  the  business  of  a 
widely  extended  bank,  whose  organization  was  lack 
ing  both  in  strength  and  centralization.  The  reduc 
tion  effected  was  almost  $3,000,000,  the  capital  being 
brought  from  nearly  $9,000,000  to  a  little  less  than 
$6,000,000. 

II.  (a)  The  Niagara  District  Bank,  one  of  the  sur 
vivors  of  "free  banks,"  lost  heavily  from  the  failure 
of  American  correspondents  in  1873.  It  is  probable 
that  the  decaying  fortunes  of  St.  Catharines,  the  city 
in  which  the  bank  was  established,  also  affected  it. 
The  paid-up  capital  in  June,  1873,  was  $356,000.  The 
bank  was  amalgamated  in  1875  with  the  Imperial 
Bank  of  Canada  (38  Vic.,  cap.  61),  and  an  exchange 
of  shares  made  on  the  basis  of  the  relative  value  of 
the  two  stocks.  Certain  assets  of  the  Niagara  Dis 
trict  Bank  were  excluded  from  the  reckoning  for 


Bank  Failures  and  Losses,  1874-1879 


281 


realization   in  exclusive  behalf  of  the  original  pro 
prietors. 

(b)  In  1876    the    St.    Lawrence    Bank,  of  Toronto, 
was  rechristened  the  Standard  Bank  of  Canada,  and 
shares  of  the  old  bank's  stock   of  the  par   value   of 
$100  exchanged  against  new  shares  worth  $50,  at  the 
ratio  of  one  to  one  and  a  half.    This  operation,  nomi 
nally  an  amalgamation,  was  really  a  stock  reduction 
(amounting  to  not  more  than  $150,000),  by  which  the 
bank   could   start  on  a  new  basis,  and   escape  what 
ever  associations  may  have  been  attached  to  the  name 
St.  Lawrence.     (39  Vic.,  cap.  45.) 

(c)  At  the  instance  of  the  City  Bank,  then  under 
the  presidency  of  Sir  Francis  Hincks,  that  corporation 
and  the  Royal   Canadian  Bank   agreed  to   unite  in 
September,  1875.     The  agreement  was  confirmed  by 
Parliament  in  1876,  and  the  two  reincorporated  as  the 
Consolidated  Bank.  (39  Vic.,  cap.  44.)    No  reduction 
of  capital  occurred  at  this  time,  but  rather  an  increase. 
The  reasons  for  the  union  are  obscure;  the  subse 
quent  history  of  the  united  bank  pertains  to  another 
part  of  the  section. 

III.  (a)  The  Metropolitan  Bank  of  Montreal  was 
one  of  the  banks  chartered  in  1871.  From  the  first 
it  engaged  largely  in  loaning  upon  bank  stocks,  and 


282  The  Canadian  Banking  System,  1817-1890 

given  in  the  return  for  October,  1876,  the  assets  of 
the  bank  were  $314,000  less  than  the  liabilities  to  the 
public  and  shareholders.  In  June,  1877,  authority 
having  been  obtained  from  Parliament,  the  share 
holders  resolved  gradually  to  wind  up  the  bank,  pay 
off  its  debts,  and  save  their  investments  from  furthur 
depreciation.  The  reduction  of  paid-up  banking 
capital  due  to  this  action  was  $800,170. 

(b)  Like  the  Metropolitan,  the  Stadacona  Bank  of 
Quebec  was  one  of  the  younger  corporations.  And 
like  those  of  the  Metropolitan,  its  shareholders,  dis 
couraged  by  adverse  fortune,  decided  to  wind  it  up. 
Voluntary  liquidation  was  begun  iri  July,  1879. 
Within  two  years  the  proprietors  had  recovered  about 
90  per  cent,  of  their  investments,  and  the  prospect 
for  further  returns  was  good.1  By  this  action  $990,000 
were  withdrawn  from  the  banking  capital  of  the 
country. 

IV.  So  far  a  gross  reduction  of  $6,500,000  in  capital 
alone  has  been  accounted  for,  without  mention  of  the 
other  ways  in  which,  to  meet  their  losses,  the  banks 
were  obliged  to  reduce  the  valuation  of  their  re 
sources.  To  investors,  of  course,  reduction  of  rests 
or  reserve  funds,  the  application  of  earnings  to  pre 
vent  the  impairment  of  capital,  and  the  falling  off  in 
dividends,  was  almost  as  serious  as  actual  impair 
ment  of  capital.  The  average  rate  of  dividend  paid 
in  1874  by  banks  in  Ontario  and  Quebec,  was  8.76 
per  cent.;  in  1878,  6.46  per  cent.;  in  1879,  less  still. 
The  shrinkage  of  the  market  value  of  bank  shares 
in  four  years  was  estimated  in  1878  at  not  less  than 
$17,000,000.  In  1879  Sir  Francis  Hincks  reckoned 
the  shrinkage  at  $25,000,000. 

1  Monetary  Times,  vol.  xiv,  p.  70. 


Bank  Failures  and  Losses,  1874-1879  283 

From  the  standpoint  of  the  banking  interests,  the 
year  1879  was  the  most  disastrous  of  the  five.  On 
the  28th  May  the  Mechanics'  Bank  stopped  payment; 
on  the  16th  June,  La  Banque  Jacques  Cartier;  on 
the  1st  August,  the  Consolidated  Bank;  on  the  7th, 
the  Exchange  Bank;  on  the  8th,  La  Banque  Ville 
Marie;  and  in  October,  the  Bank  of  Liverpool.  All 
save  the  last  named  had  their  head  offices  in  Montreal. 
Naturally  the  public  were  alarmed  by  so  many  sus 
pensions,  and  began  to  wonder  where  difficulty  would 
next  arise.  But  the  condition  of  the  failed  banks, 
if  the  decline  of  stocks  is  an  indication,  had  been 
suspected  for  some  time.  Many  former  creditors  had 
transferred  their  trust  to  banks  in  better  esteem. 
Moreover,  it  was  known  that  the  Exchange,  Ville 
Marie  and  Jacques  Cartier  Banks  would  soon  be 
enabled  to  resume.  The  press  and  financial  leaders 
pointed  out  the  exceptional  circumstances  of  the 
banks  in  trouble,  and  urged  the  people  to  main 
tain  a  sober  calm.  Runs  started  upon-  some  of  the 
solvent  banks  were  cordially  met,  and  in  one  way 
and  another  a  bank  panic  was  again  averted. 

(a)  The  first  of  the  failures  was  the  worst.  The 
Mechanics'  Bank  had  been  a  blot  on  the  Canadian 
banking  system  for  years,  and  it  died  at  last  because 
it  was  too  corrupt  to  live.  The  support  accorded  for 
a  time  by  the  Molsons'  Bank  was  withdrawn  in  1876. 
The  Mechanics'  was  then  obliged  to  reduce  its  capital 
by  40  per  cent.  Its  subsequent  existence  was  main 
tained  by  means  neither  worthy  nor  legitimate.  The 
managers  had  almost  no  support  from  reputable 
business  men,  their  discount  business  was  small  and 
confined  to  the  most  undesirable  classes.  The  circu 
lation,  on  the  contrary,  was  higher  in  proportion  to 


284  The  Canadian  Banking  System,  1817-1890 

capital  than  that  of  any  other  bank  in  Montreal,  but 
it  was  kept  up  by  artificial  and  improper  methods. 
Brokers  in  Montreal,  and  agents  on  the  steamboats 
and  at  the  hotels,  were  used  by  the  Mechanics'  Bank 
to  change  its  notes  for  other  paper,  and  were  paid  for 
the  service.  After  its  failure,  the  shareholders  were 
forced  to  contribute  the  whole  of  the  double  liability. 
Even  then  but  forty-five  cents  on  the  dollar  of  the 
bank's  debts,  either  by  notes  or  deposits,  had  been 
paid  in  1882,  and  in  the  end  only  574-  per  cent,  of  its 
liabilities  were  redeemed.  The  principal  sum  thus 
lost  by  the  creditors  was  not  less  than  $240,000;  the 
reduction  of  the  banking  capital  of  the  Dominion, 
caused  by  its  losses  and  disappearance,  about  $450,000. 
(b)  From  the  failure  of  the  Consolidated  Bank,  on 
the  contrary,  the  public  lost  nothing  beyond  the  dis 
count  of  10  to  25  per  cent,  to  which  the  note-holders, 
wishing  to  realize  soon  after  the  suspension,  were 
obliged  to  submit,  and  the  interest  upon  claims,  the 
payment  of  which  was  postponed  until  the  bank's 
assets  could  be  liquidated.  To  analyze  the  causes  of 
this  failure,  it  would  be  necessary  to  examine  the 
comparatively  weak  condition  both  of  the  City  and 
Royal  Canadian  Banks  at  the  time  of  amalgamation 
in  1875,  their  small  rests  and  mediocre  earning  power, 
the  evils  of  the  double-headed  system  of  manage 
ment  adopted,  the  incompetence  of  certain  higher 
employes  of  the  bank,  unjustifiable  advances  to  firms 
of  small  calibre  in  Montreal  and  elsewhere,  and  the 
unhealthy  condition  of  Canadian  business  in  general 
at  the  time  the  Consolidated  met  its  heaviest  losses. 
In  May,  1879,  authority  was  granted  to  reduce  its 
paid-up  capital,  then  about  $3,500,000,  by  40  per  cent. 
(42  Vic.,  cap.  53.)  A  new  manager  and  three  new 


Bank  Failures  and  Losses,  1874-1879  285 

directors  discovered  other  losses  amounting  to 
$1,420,000.  Soon  after  the  bank  failed.  In  1881  a 
Montreal  stock  broker  offered  to  give  8260,000  for 
the  Consolidated's  assets,  and  pay  what  debts  were 
still  outstanding.  He  was  accepted  by  the  stock 
holders.  Including  the  10  per  cent,  dividend  already 
declared,  the  stockholders  thus  recovered  about 
twenty-three  cents  on  the  dollar  of  their  reduced 
stock.1 

(c)  The  Bank  of  Liverpool  failure  differed  from 
that  of  the  Mechanics'  in  degree  rather  than  kind. 
After  the  suspension  of  1873,  the  stock  had  been 
transferred  to  new  holders,  the  bank  and  business 
reorganized.  Further  losses  were  suffered,  which 
in  1876  reduced  the  value  of  the  capital  to  $100,000. 
It  managed,  nevertheless,  to  survive  till  the  autumn 
of  1879.  It  failed  in  October  for  total  liabilities  of 
$136,000.  The  Bank  of  Nova  Scotia  bought  its 
assets,  and  paid  the  $4,000,  or  less,  of  notes  which 
had  been  issued.  The  stockholders  successfully 
evaded  the  efforts  to  collect  the  double  liability  down 
till  1890.  As  the  item  in  the  balance  sheet  of  the 
Dominion,  termed  "Bank  of  Liverpool  Liquidation 
Account,"  still  stands  at  $84,996,  the  exact  amount 
shown  in  "Government  Deposits"  in  the  last  state 
ment  returned  by  the  bank  before  its  suspension,  one 
may  conclude  that  its  debts  have  not  been  reduced 
in  the  last  four  years.  If  this  be  so,  the  creditors 
have  lost  $132,810,  and  the  interest  for  fifteen  years; 
$35,053  of  the  principal  was  owed  to  other  banks, 
and  $12,761  to  the  general  public,  the  rest  to  the 

^Monetary  Times,  vol.  xv,  p.  127.  "The  Canada  Securities  Com 
pany"  was  the  formal  title  of  the  purchaser  of  the  Consolidated's 
assets. 


286  The  Canadian  Banking  System,  1817-1890 

government.      The  shareholders,   of   course,  lost  all 
their  investment,  in  round  numbers,  $370,000. 

The  Liverpool's  was  the  last  of  this  series  of 
failures.  Including  the  debts  of  the  Bank  of  Acadia, 
the  ultimate  loss  of  principal  by  creditors  from  the 
three  disasters  was  less  than  $500,000.!  The  losses 
inflicted  upon  shareholders  by  the  various  operations 
detailed  in  this  section  were  far  heavier,  not  less, 
probably,  than  $12,000,000.2  Upon  the  banking 
system  of  Canada  the  general  effect  must  be  regarded 
as  hygienic  and  highly  salutary.  The  business  was 
purged  of  well-nigh  twelve  badly  invested  millions.3 
The  excessive  banking  competition  so  conducive  to 
the  unsound  trade,  exaggerated  "enterprise,"  and 
speculation  on  borrowed  capital  that  had  festered  in 

^r,  precisely,  according  to  the  most  careful  calculation,  $482,300. 

2The  materials  for  these  calculations  and  the  statistics  as  to  banks 
failed  or  going  into  liquidation,  were  mostly  derived  from  an  un- 
printed  "Retuph  to  an  Order  of  the  House  of  Commons,  dated  the 
23d  January,  1890,"  Sessional  Papers,  Canada,  1890,  vol.  xv,  30  c. 
Other  sources v  were  the  Monetary  Times,  various  daily  newspapers 
containing  rejprts  of  shareholders'  meetings,  etc.,  the  "Statement 
of  Banks  acting  under  Charter,"  published  in  the  Canada  Gazette, 
and  for  some  facts,  private  letters  from  persons  acquainted  with 
them.  Part  of  the  Return  cited,  it  should  be  said,  is  printed  in  Gar 
land,  ut  supra,  p.  42;  but  this  quotation  contains  at  least  two  serious 
errors,  namely,  as  to  the  dividends  paid  to  depositors  in  the  Bank 
of  Liverpool  and  in  the  Exchange  Bank  of  Canada.  In  neither 
case  was  the  payment,  as  Mr.  Garland  has  it,  made  in  full,  but  the 
dividend  from  the  former  bank  to  creditors,  not  noteholders,  was 
practically  nothing,  from  the  latter  about  66  per  cent. 

3Cf.  the  remarks  of  the  general  manager  of  the  Bank  of  Mont 
real,  on  the  4th  June,  1878:  "There  is,  perhaps,  no  department  of 
business  where  competition  is  more  keenly  felt  than  in  banking. 
We  have,  perhaps,  as  great  an  excess  of  banking  capital  as  in  any 
other  line  of  business.  We  have  to  compete  not  only  with  the 
capital  wielded  by  our  neighbors  in  Canada,  but  also  with  the  very 
cheap  money  of  Great  Britain,  which  is  finding  its  way  more  and. 
more  into  this  country." — Monetary  Times,  vol.  xi,  p.  1432. 


Bank  Failures  and  Losses,  1874-1879  287 

the  country's  commerce,  was  palliated.  Mindful  of 
the  lessons  taught  by  five  years  of  depression,  and 
animated  by  the  resolve  to  buy  less  and  produce 
more,  to  live  economically  and  work  hard,  Canadians 
were  now  prepared  to  turn  to  best  advantage  the 
changes  that  were  about  to  come  in  their  affairs. 
The  banks,  too,  relieved  in  great  degree  of  the 
incubus  of  inflated  assets  and  capital  beyond  their 
needs,  were  now  in  the  best  of  condition  to  extend 
their  business  in  safe  directions,  and  in  so  doing,  to 
lend  their  countrymen  whatever  help  should  be 
deserved. 

In  October,  1879,  the  tide  finally  turned.  The 
prices  of  wheat  and  flour  rose  by  nearly  33*  per  cent. 
The  iron  market  improved,  Breadstuffs,  groceries 
and  dairy  products  increased  in  value.  The  market 
for  timber  and  sawn  lumber  revived,  and  exports 
increased.  The  grain  crop  was  good,  and  the  farmers 
soon  disposed  of  it.  The  entire  commercial  organi 
zation  felt  the  new  impulse,  manufacturers,  importers, 
exporters,  wholesalers,  retailers.  With  the  entry  of 
a  new  party  to  the  control  of  the  government,  the 
scheme  for  a  transcontinental  railroad  was  pushed 
forward.  Millions  on  millions  were  brought  into  the 
country  in  the  next  few  years  to  build  the  Canadian 
Pacific  Railway  towards  the  western  coast.  Settle 
ment  in  Manitoba  had  been  started  some  years  before 
1879.  Immigration  now  increased  rapidly.  Canad 
ians  also  took  a  part  in  the  development  of  the  West. 
Extraordinary  activity  in  real  estate  began  along  the 
line  of  the  new  railroad,  and  indeed,  throughout  the 
more  accessible  portions  of  Manitoba.  But  this  is 
material  for  the  historian.  We  must  turn  to 


288  The  Canadian  Banking  System,  1817-1890 

|  46.  —  THE  BANK  ACT  REVISION  OF  1880 

Such  changes  as  were  made  in  the  banking  law  of 
the  Dominion  after  1872,  were  designed  to  correct 
defects  of  detail  rather  than  alter  general  principles. 
In  1878  the  form  of  the  monthly  return  was  expanded 
in  the  manner  shown  by  the  table  in  Appendix  I. 
(36  Vic.,  cap.  43.)  An  act  of  1875  relaxed  the  clause 
by  which  the  bank  was  unconditionally  forbidden, 
directly  or  indirectly,  to  deal  in  shares  of  its  capital 
stock,  an  exception  being  granted  for  the  necessity 
to  realize  upon  such  shares  held  by  the  bank  as 
security  for  any  pre-existing  and  matured  debt.1 
The  form  of  the  monthly  return  was  again  amended, 
and  a  statement  of  the  direct  and  indirect  liabilities 
of  the  directors  required.  (38  Vic.,  cap.  17.)  In 
1876  a  general  Insolvent  Act,  passed  the  year  before, 
was  applied  to  incorporated  banks,  with  modifications 
for  their  peculiar  powers  and  circumstances.  (39 
Vic.,  cap.  31.)  By  1879  the  evils  of  permitting  the 
banks  to  loan  upon  shares  in  other  chartered  banks 
were  become  too  manifest  longer  to  be  tolerated. 
The  clause  permitting  loans  upon  shares  was  stricken 
out  by  an  act  taking  effect  upon  the  15th  November, 
1879.  (42  Vic.,  cap.  45.)  The  lien  in  favor  of  the 
banks  upon  shares  held  as  security  for  such  loans 
then  current,  or  for  renewals  thereof,  was  declared 
to  cease  with  the  end  of  the  Parliamentary  session 
of  1880.  To  enforce  the  prohibition,  banks  were 
required,  under  penalty,  to  number  their  shares, 
while  in  all  contracts  for  the  sale  of  bank  stock, 
made  after  the  1st  October,  1879,  it  became  necessary 

xThe  expression  "Bank"  is  denned  to  mean  any  bank  to  which 
the  act  applies.  (33  Vic.,  cap.  5,  sec.  2.) 


The  Bank  Act  Revision  of  1880  289 

to  specify  the  numbers  of  the  shares  conveyed.     Not 
to  do  so  was  made  a  misdemeanor. 

The  expiry  of  all  bank  charters  had  been  set  for 
the  1st  July,  1881.  In  accord  with  the  policy  adopted 
a  decade  before,  Ministry  and  Parliament  took  up,  in 
the  session  of  1880,  the  question  of  what  changes  to 
make  in  the  system  at  the  time  of  the  first  decennial 
renewal  of  charters. 

They  were  anticipated  both  by  the  public  and  banks. 
Among  the  people,  much  dissatisfaction  had  been 
caused  by  the  bank  suspensions  of  the  preceding  year. 
The  notes  of  only  one  of  the  failed  banks  were  finally 
redeemed  at  less  than  their  nominal  value,  but  at  that 
time  liquidation  in  several  cases  was  still  incomplete. 
To  change  the  notes  of  failed  banks  into  convertible 
paper,  the  holder  had  to  submit  to  a  discount,  and  the 
brokers  who  took  the  risk  exacted  ample  pay  for  it. 
Many  of  those  holding  notes  at  the  times  of  suspen 
sion  had  only  the  option  between  this  loss  and  phys 
ical  want.  They  were  forced  to  realize  at  the  time 
when  the  credit  of  their  debtors  was  at  the  lowest 
ebb.  They  could  not  even  wait  until  the  fears  of  the 
first  week  were  quieted,  much  less  till  the  day  of  final 
payment.  And  upon  other  scores,  the  failure  of  the 
Mechanics'  Bank,  the  shameful  inadequacy  of  its 
assets,  and  the  pitiful  dividends  paid  to  its  creditors, 
gave  every  one  just  cause  for  complaint. 

The  bankers  understood  the  popular  discontent 
with  the  security  of  the  currency.  They  saw  their 
own  interest,  and  the  country's  interest,  no  doubt,  in 
calming  it.  For  them,  their  privilege  of  circulation 
provided  an  easy,  convenient,  and  useful  means  of 
profit;  to  the  country,  it  gave  an  elastic  currency, 
increased  sources  of  discount,  and  through  the  system 
19 


290  The  Canadian  Banking  System,  1817-1890 

of  branches  promoted  by  it,  widespread  and  accessi 
ble  banking  facilities.  To  make  the  currency  more 
secure  would  be  a  help  to  the  banking  interest  no  less 
than  to  the  people;  the  one  would  be  strengthened  in 
credit,  and  the  other  protected  from  loss. 

Sir  Samuel  Leonard  Tilley,  of  New  Brunswick,  was 
then  Minister  of  Finance.     To  him  the  bankers  pre 
sented,  as  with  one  voice,  their  proposals  for  reform. 
Among  them  was  the  plan  to  make   the  notes  issued 
by  a  bank  the  first  charge   upon  its  assets  in  case  of 
insolvency.     It   was   believed    that  by  this   plan  the 
ultimate  payment  of  all  bank  notes  in  full  would  be 
assured.     For  the  total  assets  of  each  bank  were  from 
six  to  ten  times  its  debts  on  notes,  and  it  was  thought 
impossible   for   a  bank   to  keep  in  business  until  its 
entire  assets  were  worth  but  one-sixth  or  one-tenth 
their  nominal  amount.     Beyond  the  assets,  there  was 
the  reserve  liability  of  shareholders,  equal  always  to 
the  highest  limit  of  the  authorized  note  issue.     That 
limit  might  be  exceeded,  but  riot  without  fraud.     To 
prevent  such  fraud,  the  fear  of  punishment  was  be 
lieved  effective.     Even  the  most  reckless  bank  opera 
tor  would  know  that   the  world   is   a   small  place  for 
the  criminal,   and  the   arm  of  the  law  surprisingly 
long. 

}  Against  the  scheme,  revived  apparently  by  the 
bank  troubles  of  1879,  to  remodel  Canadian  charters 
on  the  plan  of  the  National  Banking  System  of  the 
United  States,  the  bankers  exerted  an  energetic  op 
position  on  grounds  with  which  we  are  long  familiar. 
Another  proposal  was  to  establish  a  government 
bank  inspection,  or  to  provide  for  the  appointment  of 
an  auditor  by  shareholders.  Some  of  the  banks  had 
been  grossly  neglectful  of  proper  inspection,  and  dif- 


The  Bank  Act  Revision  0/1880  291 

ficulties  arising  between  1876  and  1879  were  clearly 
traceable,  in  certain  cases,  to  the  failure  promptly  to 
detect  and  acknowledge  the  character  of  questionable 
assets.  But  the  bankers  argued  that  on  account  of 
its  many  branches,  and  the  multiplicity  and  variety 
of  the  commercial  paper  in  its  assets,  it  would  be  im 
possible  for  a  government  inspector,  or  an  auditor, 
properly  to  inspect  a  Canadian  bank.  It  was  far  bet 
ter  to  rely  on  the  careful  organization  of  the  banks, 
the  vigilance  of  the  directors,  and  the  inspection  by 
trained  men  of  its  own  staff,  who,  travelling  the  year 
round  from  branch  to  branch  and  reporting  to  the 
general  manager,  would  have  nought  to  gain  by  con 
cealing  the  truth,  and  everything  to  lose.  Then  if  a 
bank  upon  which  the  report  of  the  government  in 
spector  had  been  favorable  should  fail,  many  of  those 
who  had  made  their  deposits  on  the  strength  of  the 
official  report  would  certainly  hold  the  government 
responsible  for  such  loss  as  they  might  incur.  The 
Minister  decided  in  favor  of  all  three  of  the  conten 
tions  of  the  bankers. 

The  resolutions  for  the  Banking  Act  Amendment 
bill  brought  down  by  Sir  Leonard  Tilley,  were  adopted 
by  the  House  without  much  objection,  and  after  very 
short  debate.  The  principal  proposal,  further  to 
secure  the  note  circulation,  was  objected  to  by  Liber 
als  as  likely  to  increase  the  danger  of  runs  from 
depositors,  if  from  no  other  motive  than  a  desire  to 
convert  their  ordinary  claims  into  privileged  liens.1 
This,  it  will  be  remembered,  was  the  view  taken  by 
Sir  Francis  Hincks  in  1870,  a  Minister  to  whom  they 
were  also  in  opposition.  But  what  really  deprived 

Debates  of  the  House  of  Commons,  Canada,  1880,  vol.  ii,  p.  1729, 
Remarks  of  Sir  Richard  Cartwright. 


292  The  Canadian  Banking  System,  1817-1890 

the  criticism  of  its  force   was  the  fact  that  the  pro 
posal  now  came  from  banks.     The  bill  itself  was  pre 
sented  on  the  27th  April,  1880.     It  passed  the  House 
on  the  5th  May,  the  Senate  on  the  7th.     On  the  same 
day  it  received  the   royal  assent.       (43  Vic.,  cap  22.) 
The  charters  of  the  thirty-four  banks  still  in  opera 
tion  were  continued  to  the  1st  July,  1891,  and  those 
of  four  others  until  their  liquidation  should  be  com 
pleted.     Besides  establishing  a  prior  lien  in  favor  of 
the  holder  of  an  insolvent   bank's  note,  the  act  pro 
hibited   the  issue  or  re-issue   of  notes  for  sums  less 
than  $5,  or  for  sums  not  multiples  of  $5,  and  called  for 
the  retirement  of  all  |4  notes  as  soon  as  practicable. 
The  banks  were  obliged,    when    making    any    pay 
ments,  to  pay  the   sum  at  the  request   of  the  payee, 
or  so  much  thereof,   not  exceeding  $50,  as  might  be 
requested,  in  Dominion  notes  for  one  or  two  dollars 
each,  at  the  option   of  the  receiver.     The  proportion 
of  cash  reserves  to  be   held  in   Dominion  notes  was 
raised  from  one-third  to   40   per  cent.     Proxies  not 
made  or  renewed  in  writing  within  three  years  next 
preceding  a  meeting  of  shareholders  were  declared 
invalid  for  purposes  of  voting. 

Persons  holding  stock  as  representing  others,  if  so 
declared  in  the  bank's  books,  were  exempted  from 
liability  on  such  stock,  recourse  being  reserved 
against  the  estate  and  funds  held  in  trust.  The  form 
of  the  monthly  return  was  again  expanded,  partly  to 
secure  more  complete  details  of  the  position  of  the 
several  banks,  partly  to  remove  the  ambiguities  in 
the  return,  by  which  criminal  prosecutions  under  the 
Bank  Act  had  been  lost  by  the  Crown  in  1879. l  As  a 
safeguard  against  investments  of  too  great  perma- 
1Morgan,  'The  Dominion  Annual  Register,"  Montreal,  1879,  p.  320. 


The  Bank  Act  Revision  of  1880  293 

nence,  the  period  for  which  the  bank  might  hold 
real  property  not  required  for  bank  premises,  was 
limited  to  seven  years  from  the  date  of  acquisition. 
The  assumption  by  any  firm  or  bank  of  the  title  of 
"bank"  without  authority  under  the  general  banking 
laws  of  the  Dominion  was  made  a  misdemeanor. 
The  purpose  of  the  clause  was  to  guard  the  public 
from  misplacing  their  confidence  on  the  supposition 
they  were  dealing  with  establishments  recognized 
by  Parliament;  one  result  was  -to  confirm  to  the  char 
tered  corporations  exclusive  privileges  in  the  name. 
The  requirement  that  bank  shares  should  be  num 
bered,  and  the  numbers  specified  in  contracts  for  the 
sale  of  shares,  was  repealed.  It  had  interfered  with 
legitimate  trade  in  bank  stock,  while  the  brokers, 
against  whom  it  was  aimed,  had  successfully  evaded 
it.  The  sections  of  the  Bank  Act  dealing  with  loans 
upon  warehouse  receipts,  etc.,  were  again  amended.  * 
Besides  timber,  all  sorts  of  lumber,  all  agricultural 
produce,  and  other  articles  of  commerce,  the  expres 
sion  ;igoods,  wares  and  merchandise''  was  extended 
to  include  petroleum  and  crude  oil.  A  bank,  upon 
shipment  of  goods,  was  permitted  to  surrender  the 
warehouse  receipt  for  them,  and  receive  in  exchange 
a  bill  of  lading,  or  upon  delivery  and  storage  of  the 
goods,  to  surrender  the  bill  of  lading  received  as 
security,  and  take  a  warehouse  receipt  in  exchange. 
Some  further  changes  were  made  in  1883,  with  the 
purpose  of  more  effectually  enforcing  the  prohibi 
tions,  restrictions  and  duties  already  imposed  on  the 
chartered  banks.  Most  of  these  had  hitherto  been 
sanctioned  by  the  penalty  of  charter  forfeiture. 
Experience  had  proven  that  this  was  insufficient  by 
reason  of  its  excessive  severity.  The  banks  had 


294          The  Canadian  Banking  System,  1817-1890 

imposed  somewhat  upon  the  unwillingness  of  the 
government  to  punish  a  slight  transgression  by  de 
priving  the  guilty  corporation  of  its  existence.  So, 
while  the  penalty  of  forfeiture  was  held  in  reserve, 
money  penalties  were  now  adopted  to  bring  the  banks 
to  time.  For  each  day's  delay,  after  the  opening  of 
Parliament,  in  transmitting  to  the  Minister  of 
Finance  the  certified  list  of  shareholders,  a  fine  of 
$50  was  imposed.  The  penalties  laid  down  upon  note 
issue  in  excess  of  capital  stock  paid  in,  were  as 
follows: 

For  an  excess  not  exceeding  $20,000 $      100 

For  an  excess  between  $20,000  and  $100,000. . . .  1,000 
For  an  excess  between  $100,000  and  $200,000. . .  5,000 
For  an  excess  exceeding  $200,000 10,000 

Other  fines  were:  for  each  time  that  the  Dominion 
notes  in  the  cash  reserve  should  be  less  than  40  per 
'cent,  thereof,  $250;  for  each  day  of  neglect  to  send 
the  return  within  twenty  days  of  the  end  of  each 
calendar  month,  $50;  for  each  contravention  of  the 
sections  limiting  the  business  of  the  bank  to  certain 
transactions  and  classes  of  loans,  $500.  The  form  of 
the  return  was  amended  to  show  the  amount  of  the 
rest  or  reserve  fund,  and  the  rate  per  cent,  of  the  last 
dividend.  The  last  change  to  be  mentioned  was 
opposed  by  friends  of  the  many  private  banks,  but 
was  become  necessary,  further  to  prevent  the  public 
from  being  misled.1  The  use  of  the  titles,  "  Banking 
Company,"  "Banking  House,"  "Banking  Associa 
tion,"  "Banking  Institution,"  or  "  Banking  Agency/' 
by  bankers  not  working  under  the  Bank  Act,  was 

xDebates  of  the  House  of  Commons,  Canada,  1883,  pp.  99etseq., 
188,  194.  Remarks  of  Sir  Leonard  Tilley,  Messrs.  Blake,  Fairbank, 
and  Casey. 


Dominion  Note  Legislation,  1872-1880  295 

made  a  misdemeanor,  unless  the  expression  iCnot 
incorporated"  were  added  to  the  title.  (46  Vic., 
cap.  20.) 


g47. — DOMINION  NOTE  LEGISLATION,   1872-1880 

Though  one  of  them  was  explained  as  a  response 
to  public  complaint  of  difficulty  in  securing  Domin 
ion  notes,  the  new  clauses  of  the  act  of  1880  in 
regard  to  these  legal  tender  issues  were  altogether  in 
the  interest  of  the  government.  Likewise  in  the 
interest  of  the  government  was  the  provision  by 
which  the  banks  were  deprived  of  the  right  to  issue 
notes  for  $4.  For  it  was  intended  partly  to  refill 
their  place  in  the  circulation  by  Dominion  notes,  and 
to  increase  the  issue  in  other  ways. 

Under  pressure  from  friends  of  the  government  Sir 
Francis  Hincks  had  reluctantly  consented  in  1872  to 
mar  the  beautiful  analogy  to  the  English  system  he 
had  devised  in  his  first  Dominion  Note  Act.  The 
reserve  of  specie  required  against  issues  in  excess  of 
nine  million  dollars  was  reduced  from  dollar  for  dollar 
to  "not  less  than  35  per  cent,  of  the  excess."  (35 
Vic.,  cap.  7.)  Prior  to  1874  there  was  frequent  criti 
cism  of  the  inadequacy  of  the  reserve  held  against 
the  notes,  and  complaints  that  the  requirement  as  to 
bank  reserves  had  diminished  the  amount  of  gold  in 
the  country.  One  also  finds  protests  that  the  gov 
ernment  should  cease  to  issue  from  Toronto  notes 
payable  at  Montreal,  or  vice  versa,  and  that  when 
called  on  for  specie  to  ship  for  New  York,  it  should 
desist  from  paying  out  sovereigns  instead  of  eagles, 
and  thereby  forcing  American  gold  to  a  premium, 
often  one-eighth  of  one  per  cent.  Nothing  has  yet 


296  The  Canadian  Banking  System,  1817-1890 

appeared  to  justify  the  opinion  that  these  criticisms, 
complaints  and  protests  were  without  good  cause. 

When  the  Liberals  came  into  power  they  improved 
the  law  in  accord  with  the  sound  monetary  theories 
of  their  Minister  of  Finance,  Sir  Richard  J.  Cart- 
wright.  By  the  amending  act  of  1875  (38  Vic.,  cap. 
5),  the  Receiver  General  was  required  to  hold  against 
the  outstanding  circulation  in  excess  of  $9,000,000 
and  less  than  $12,000,000,  50  per  cent,  in  specie;  and 
against  any  excess  over  $12,000,000,  specie  to  the 
full  amount.  In  1876  the  laws  respecting  Dominion 
notes  were  extended  to  the  provinces  of  Prince 
Edward  Island,  British  Columbia  and  Manitoba, 
and  the  Governor  authorized  to  establish  branch 
offices  of  the  Receiver  General's  department  at  Char- 
lottetown,  Victoria  and  Winnipeg. 

Sir  Leonard  Tilley  now  proposed  to  extend  the 
limit  of  notes,  only  partially  covered  by  specie,  to 
$20,000,000,  the  circulation  to  be  increased  by  not 
more  than  $1,000,000  at  a  time,  or  more  than  $4,000,- 
000  in  any  one  year.  At  the  same  time,  he  proposed 
to  reduce  the  strength  of  the  specie  reserve  by  pro 
viding  that  a  minimum,  equal  merely  to  15  per  cent, 
of  the  amounts  outstanding,  should  be  covered  by 
gold;  by  this  gold  and  Dominion  securities  guaranteed 
by  the  government  of  the  United  Kingdom,  not  less 
altogether  than  25  per  cent.;  and  the  remaining  75  per 
cent,  or  less  of  the  issue  by  Dominion  debentures, 
issued  for  the  purpose,  and  held  by  the  Receiver 
General.  The  project  was  strongly  opposed  by  the 
minority  in  Parliament.  It  was  the  rallying  point  of 
the  whole  debate  upon  questions  of  banking  and  cur 
rency.  The  Minister,  however,  beheld  the  prospect 
of  added  financial  aid;  he  heard,  perhaps,  the  clamors 


1880-1890  297 

of  the  4'rag  baby"  as  well  among  the  people  as  in 
Parliament.  He  was  confident  his  bill  would  find 
favor  among  the  friends  of  government  paper.  His 
party  was  always  ready  to  follow  Sir  John  Macdon- 
ald,  and  Sir  John  strongly  supported  the  bill.  It 
passed,  as  a  matter  of  course;  but  the  victory  was 
one  of  votes  rather  than  reason.  (43  Vic.,  cap.  13.) 


§48.— 1880-1889 

Two  of  the  general  measures  relating  to  banks, 
and  passed  by  Parliament  in  these  years,  have  been 
mentioned.  The  only  other  important  laws  in  the 
group  were  three  acts  respecting  corporate  bank 
ruptcy:  -'an  Act  respecting  Insolvent  Banks,  Insur 
ance  Companies,  Loan  Companies,  Building  Societies, 
and  Trading  Corporations,"  passed  in  1882,  another 
of  the  same  title  in  1886,  and  the  "  Winding-Up 
Amendment  Act"  of  1889.  (45  Vic.,  cap.  23;  49  Vic., 
cap.  129;  52  Vic.,  cap.  32.)  To  describe  these  meas 
ures  in  their  entirety  would  involve  too  long  an  ex 
cursus  into  bankruptcy  law,  and  only  seven  of  the 
one  hundred  and  twenty-three  sections  of  the  statute 
in  its  final  form  applied  exclusively  to  banks. 

Private  acts  respecting  individual  banks  were  far 
more  frequent.  There  had  been  two  new  charters 
granted  between  1875  and  1879,  to  wit:  in  1875  to 
the  « Banque  Saint  Jean  Baptiste,"  of  Montreal,  and 
"  The  Chartered  Bank  of  London  and  North  America  " 
in  1876.  (38  Vic.,  cap.  59;  39  Vic.,  cap.  40.)  The 
latter  bank  had  as  charter  members,  two  bank  presi 
dents,  one  a  member  of  the  House,  the  other  of  the 
Senate,  the  mavor  of  Toronto,  and  three  other  sena- 


298  The  Canadian  Banking  System,  1817-1890 

tors;  but  they  failed  to  attract  the  $250,000  required 
before  the  bank  could  begin  business.     Like  the  pro 
ject  of  the  <'  London  and  Canada  Bank,"  whose  char 
ter  was  extended  a  further  year  in  1876,  it  was  the 
expression  of  an  effort  to  secure  more  English  capital 
for  Canadian  uses,  by  means  of  a  colonial  bank  with 
an  agency  established  in  London,  England,  under  a 
local  board  of  directors.     The  charter  was  revived, 
amended,    and    the    name  of   the    proposed    concern 
changed   to    the  "Chartered    Bank  of    London    and 
Winnipeg  "  in  1880.     But  neither  of  these  projects  to 
introduce  methods  so  closely  resembling  those  of  the 
Australian  banks,  was  ever  successfully  carried  out. 
Thirteen    new  banks    were    incorporated    between 
1882   and   1886.     There  were   four  in   1882,1  three  in 
1883,2  four  in  1884,3  and   two   in   1886.4     Of  the  four 
proposed   for   Winnipeg,   Manitoba,  one   started,  the 
Commercial  Bank  of  Manitoba.     Of  the  two  for  Mon 
treal,  for  one  of  which,  the  "Planters'  Bank  of  Can 
ada,"  it  was    planned   to    have    branches   and   local 
directors  in  the  United  Kingdom  and  the  West  Indies, 
neither  began  business.     Of  the  two  for  London,  On 
tario,  only  the  "Bank   of  London   in   Canada"  was 
established.     Of  the  three  whose  head  offices  were  to 
be  in  Toronto,  two,  the  "Central  Bank  of  Canada" 
and   the   "Traders'    Bank   of    Canada,"  secured  the 
necessary  capital.     One  other  corporation,  the  "West 
ern  Bank  of  Canada,"  opened  in  Oshawa,  Ontario. 
Out  of  the  thirteen,  eight  charters  were  forfeited  for 
non-user,  in  spite  of  the  extension,  in  four  instances, 

X45  Vic.,  cap.  61-04. 
246  Vic.,  cap.  50-52. 
347  Vic.,  cap.  48-51. 
449  Vic.,  cap.  64-66. 


1880-1890  299 

of  the  time  limit  fixed  for  payment  of  the  capital  re 
quired  before  the  charter  could  be  used. 

Another,  and  rather  farcial,  episode  of  the  Parlia 
mentary  history  of  banking  in  this  decade  was  the 
agitation  carried  on  by  a  few  strong-lunged  members 
from  the  rural  ridings.  They  wanted  ''Farmers' 
Banks,"  increased  issues  of  legal  tender  paper,  and 
the  allied  measures  which  have  been  most  favored  in 
the  United  States  by  the  Greenback  Party  and  Popu 
lists.  Similar  proposals  had  been  advanced  in  1878 
by  Mr.  Thompson,  of  Welland.1  But  the  movement 
was  begun  on  more  definite  lines  in  1884.  The  motion 
for  a  Select  Committee  to  consider  means  of  giving 
farmers  better  banking  facilities  was  supported  by 
Dr.  Orton  in  a  speech  which  still  fills  five  pages  of 
the  debates.2  His  complaint  in  behalf  of  the  farmers 
against  the  extortions  of  private  money  lenders  or 
note  shavers,  was  probably  well  founded.  Then,  too, 
the  preliminary  expense  of  search  of  title,  law  fees, 
etc.,  made  the  cost  of  short  time  loans  on  real  estate 
excessively  high;  yet  how  the  issue  of  Dominion 
notes,  secured  by  first  mortgage  on  farms,  and  re 
deemable  only  by  four  per  cent,  bonds,  could  mend 
matters,  he  failed  to  make  clear.  There  was  as  little 
reason  in  the  other  proposals,  e.  g.,  to  establish  farm, 
or  real  estate  banks  on  capitals  consisting  of  farm 
mortgages,  government  bonds,  and  gold,  to  permit 
them  to  deposit  the  capital  with  the  government, 
and  secure  paper  government  money  in  return,  to 
permit  these  banks  to  charge  no  greater  interest  on 
ordinary  loans  than  6  per  cent.,  and  on  mortgage 
loans  than  5  per  cent.,  and  to  deprive  the  chartered 

debates,  House  of  Commons,  Canada,  1879,  p.  1211. 
2  Ibid,  1884,  pp.  211-215. 


300  The  Canadian  Banking  System,  1817-1890 

banks  of  their  power  to  issue.  Underneath  the  plan, 
as  one  may  see,  lurked  hostility  to  the  banks,  and 
the  so-called  "money  power."  The  notions  enter 
tained  by  the  speaker  on  interest,  capital,  money  and 
banking  were  perverted,  while  he  was  strongly  in 
fluenced  by  a  penchant  for  irredeemable  paper  cur 
rency,  and  a  simple  faith  in  the  universal  efficacy  of 
legislation. 

The  next  year  he  drafted  resolutions  for  a  bill,  and 
was  helped  in  support  of  them  by  the  advocates  of 
small  local  banks,  admirers  of  currency  secured  by 
bonds,  and  believers  in  the  issue  of  paper  currency 
exclusively  by  government.  No  less  than  Sir  John 
Macdonald  himself  closed  this  debate,  and  in  words 
of  honeyed  ambiguity,  soothed,  even  consoled  the 
agitator,  while  not  committing  the  Government.1 
In  1886  the  question  was  again  introduced,  a  new 
bill  prepared,  and  the  measure  actually  brought  to 
the  stage  of  consideration  in  committee.  There  it 
stopped  for  good.2  In  1885  some  of  the  Opposition 
asserted  that  the  apparent  willingness  of  the  Govern 
ment  to  devote  time  to  the  discussion  was  really  a 
bit  of  fence  repairing  for  the  next  election.  Those 
less  swayed  by  party  feeling  will  doubtless  prefer  to 
explain  it  by  the  broad  and  tolerant  spirit  for  which 
the  Premier  and  his  colleagues  were  distinguished. 

The  story  of  the  banks  themselves  during  this 
decade  has  fewer  sensational  features,  and  no  such 
strong  contrasts  as  that  of  the  preceding  ten  years. 
In  most  cases  the  end  of  the  term  found  the  banks 
with  increased  business  rather  than  capital.  The 
total  capital  in  1889  was  $60,289,910,  $70,000  less 

debates,  House  of  Commons,  Canada,  1885,  pp.  115-120. 
2 Ibid,  1886,  pp.  427,  432-437,  571-585. 


1880-1890  301 

than  in  1879.  The  total  deposits,  payable  on  demand 
to  the  general  public,  rose  from  $42,000,000  on  the 
31st  December,  1880,  to  855,000,000  on  the  last  day 
of  1889;  deposits  payable  after  notice  or  on  a  fixed 
day,  from  $37,000,000  to  $71,000,000;  the  total  liabili 
ties  of  all  the  banks  from  $121,000,000  to  $171.000,000. 
Loans  on  stocks,  bonds,  etc.,  rose  from  $8,000,000  to 
$13,000,000  between  the  two  dates;  loans,  discounts 
or  advances  on  current  account  to  corporations  other 
than  municipal,  from  $4,000,000  to  $23,000,000;  cur 
rent  loans,  discounts  and  advances  to  the  public,  from 
$105,000,000  to  $150,000,000;  and  the  total  assets  of 
the  banks  from  $192,000,000  to  $252,000,000.  A 
larger  proportion  of  the  funds  of  the  banks  were  in 
vested  in  Canada  on  the  latter  date.  "  Balances  due 
from  Agencies  of  the  Bank,  or  from  other  Banks 
or  Agencies  in  Foreign  Countries,'7  were  only 
$10,729,877,  as  compared  with  $19,313,588  on  the 
31st  December,  1879,  and  $27,041,608  a  year  later. 

For  this  heavy  increase  of  business  on  both  sides 
of  the  account,  there  are  two  causes  at  least,  close 
at  hand.  The  one  is  the  growth  of  Canadian  trade 
and  industry;  the  other  the  policy  by  which  the 
number  of  branches  was  increased,  and  the  banks 
brought  into  closer  relations  with  the  country's  needs, 
particularly  those  of  the  agricultural  sections.  This 
last  may  have  been  partly  prompted  by  the  evi 
dences  of  discontent  with  their  banking  facilities 
among  the  farmers.  But  two  other  strong  induce 
ments  were  also  effective,  the  first  being  the  chance 
profitably  to  employ  funds  in  the  assistance  to  agri 
culture  and  the  industries  that  thrive  by  its  side;  the 
second,  the  opportunity  for  increasing  the  note  circu- 


302  The  Canadian  Banking  System,  1817-1890 

lation  that  a  country  business  always  affords  to 
a  bank. 

As  a  general  rule,  the  practice  of  the  banks  was 
marked  by  greater  caution  and  prudence  than  in 
1870  to  1875.  More  attention  was  paid  to  the  sound 
ness  and  security  of  business  taken  in  hand.  Inquiry 
as  to  the  application  of  means  became  more  searching. 
As  a  result,  advances  converted  by  borrowers  into 
real  estate,  improvements,  or  plant,  or  used  as  per 
manent  capital,  became  fewer,  the  losses  and  lock-ups 
less  serious.  A  share  in  this  bettering  of  the  discount 
business  must  be  ascribed  to  changes  in  the  personnel 
of  the  staff  of  the  banks.  Whether  their  first  training 
had  been  received  in  Britain  or  in  Canada,  nearly  all 
the  higher  officers  of  the  banks  had  now  enjoyed  a 
long  Canadian  experience.  To  the  admirable  tra 
ditions  of  Scotch  arid  English  banking,  they  added  a 
minute  and  extensive  knowledge  of  Canadian  con 
ditions,  a  double  equipment  which  redounded  largely 
to  the  advantage  of  their  employers.  A  keener 
appreciation  of  sound  banking  principles  may  be 
remarked  in  the  declarations  of  managers  and  presi 
dents  in  their  published  speeches  to  shareholders  ;  it 
may  be  inferred  from  the  fewer  losses  and  bad  debts 
incurred  by  the  banks  as  a  whole.  This  progress 
was  furthered  by  the  memories  of  1874  and  1879,  and 
regret  for  many  costly  mistakes  in  the  time  of  expan 
sion.  It  was  also  promoted  by  the  penalties  imposed 
for  violation  of  the  Bank  Act,  and  the  amendments 
in  the  Return,  calculated  more  fully  to  expose  a 
bank's  condition  to  the  watchful  criticism  of  the 
public. 

It  is  not  to  be  supposed  from  this  that  the  course 
travelled  by  the  banks  was  one  of  unbroken  pros- 


1880-1890  303 

perity,  or  that  the  statements,  generally  true,  were 
without  exception.  The  recovery  from  the  depression 
of  the  seventies  was  slow,  and  as  late  as  1881  it 
became  necessary  for  the  Exchange  Bank  and  the 
Banque  Ville  Marie  to  reduce  their  capitals  each  by 
one-half  million  dollars.  (44  Vic.,  cap.  35-36.) 
They,  however,  were  exceptions,  the  other  banks 
having  met  their  losses  years  before.  The  banks 
generally  shared  in  the  better  times  of  1880  to  1883  ; 
they  felt  the  reaction  in  1884-1887;  their  business, 
like  that  of  the  rest  of  the  country,  again  displayed 
normal  activity  in  1888.  The  periods  named  can  be 
understood  in  only  the  most  general  way  ;  conditions 
varied  in  different  parts  of  the  country,  and  changes 
did  not  come  at  precisely  the  same  time. 

Probably  the  most  striking  conditions  and  changes  , 
were  to  be  found  in  the  "Prairie  Province,"  Manitoba. 
There  the  railway,  immigration,  settlement  and  trad 
ing  in  real  estate  between  1879  and  1880,  developed 
a  land  boom  of  the  first  order.  The  price  of  building 
lots  in  Winnipeg,  the  provincial  capital,  rose  above 
the  value  of  land  as  centrally  located  in  Toronto  and 
Montreal.  All  kinds  of  land  schemes  were  started, 
and  there  was  a  corresponding  expansion  of  enter 
prises  of  other  sorts.  Thousands  of  persons  in 
Ontario  had  sold  the  solid  securities  which  often 
comprised  their  entire  fortune  to  put  the  proceeds  in 
lands  in  prairie  villages  of  which  the  ink  on  the  first 
survey  was  hardly  dry.  As  others  lost,  they  lost. 
The  upward  flight  of  values  was  high,  but  it  was 
brief.  The  end  came  late  in  the  autumn  of  1882.  ' 
Millionaires  in  prospect  found  themselves  paupers  in 
fact.  The  inflation  was  tolerably  thorough  through 
out  the  province,  and  when  land  values  fell,  a  good 


304          The  Canadian  Banking  System,  1817-1890 

part  of  the  community  became  insolvent  forthwith. 
Their  ruin  caused  other  failures,  and  so  on,  until 
those  were  also  brought  down  who  had  thought 
themselves,  and  were  thought  by  others,  perfectly 
independent  of  the  turn  taken  by  the  market  for  real 
estate. 

It  was  on  this  account,  and  not  because  they  had 
loaned  on  land  or  encouraged  the  inflation,  that  the 
chartered  banks  who  had  established  agencies  in 
Manitoba  lost  heavily.  Of  the  five  banks  earliest  to 
enter  the  field,  three  dismissed  their  Winnipeg  man 
agers.  This  will  indicate  how  grave  were  the  losses, 
but  not  how  great.  To  know  that,  one  would  need 
for  -some  years  to  have  attended  the  regular  board 
meetings  of  at  least  seven  different  banks.  None  of 
these  institutions  were  compelled  to  suspend  pay 
ments.  One  advantage  of  branch  banking  is  the 
possibility  under  it  to  spread  and  differentiate  risks  ; 
the  gains  of  a  bank  and  the  safety  of  its  loaning 
business  as  a  whole  does  not  depend  on  the  ups  and 
downs  of  a  single  community  or  commercial  and 
industrial  group.  Having  staked  but  a  part  of  their 
funds  in  Manitoba,  the  banks  passed  through  the 
trouble  with  their  entire  resources  lessened,  no  doubt, 
but  by  no  means  destroyed,  and  from  gains  in  the 
East  they  were  enabled  to  meet  losses  in  the  West. 
The  only  outward  signs  of  loss  were  lower  dividends, 
reduction  of,  or  smaller  additions  to  rests  and  in 
one  or  two  cases,  reduction  of  capital  stock. 

Between  1882  and  1888  six  of  the  banks  which  are 
still  in  existence,  provided  for  losses  incurred  in  their 
loaning  business  by  reductions  of  capital,  under 
authority  of  Parliament,  amounting  to  $4,070,000. 
Although  they  occurred  in  a  time  of  general  trial, 


Bank  Failures,  1883-1889  305 

the  causes  of  these  reductions  were,  as  a  rule,  pecu 
liar  to  the  situations,  mistakes,  or  management  of 
the  individual  banks.  To  examine  them  here  would 
need  inquiry  altogether  too  particular  and  minute.1 


§49. — BANK  FAILURES,  1883-1889 

Reduced  to  its  last  analysis,  the  economic  function 
of  banking  is  to  facilitate  that  exchange  of  commod 
ities   against   commodities   which  is   the   essence  of 
modern  commercial  credit.    The  ease,  cheapness  and 
thoroughness,  the  efficiency,   in   short,    with   which 
that  service  is  performed  for  other  members  of  the 
economic  organization,  is  the  first  great  point  in  the 
criticism  of  any  banking  system.     The  second  point 
is  the  security  afforded  to  those  who  must  become 
creditors  of  the  banks  in  order  to  utilize  their  services. 
Shareholders  are  obviously  excluded  from  this  class. 
Their  investments  are  commercial  ventures,  subject 
to  commercial  risks.     The  description  applies  only  to 
note  holders,  depositors  and  creditors  on  other  evi 
dences  of  debt  given  by  banks.    The  security  afforded 
them  is  measured  by  the  extent  to  which  the  obliga 
tions  of  the  banks  are  redeemed  in  full,  a  proportion 
best  ascertained  by   computing  the  more  or  less  of 
debts  which  are  not  paid,  and  the  amounts  ultimately 
lost.     The  data  as  to  such  losses  are  to  be  had  only 

irThese  reductions  were: 

Year  Amount  of  Reduction 

1882  Ontario  Bank $3,000,000  to  $1,500,000.  45  Vic.,  cap.  57. 

EY™thBan* .  °'  f      35°'<*°  to  280,000.  45  Vic.,  cap.  60. 

1885  LaBanque  du  Peuple.  1,600,000  to  1,200,000.  48-49  Vic., cap.  8. 

1886  Union  B'k  of  Canada.  2,000,000  to  1,200,000.  49  Vic.,  cap.  58. 
1886  Bank  of  N.  Brunswick  1,000,000  to  500,000.  49  Vic.,  cap.  59. 
1888  La  Banque  Nationale  2,000,000  to  1,200,000.  51  Vic  ,  cap.  48. 

20 


306  The  Canadian  Banking  System,  1817-1890 

from  study  of  bank  failures.  The  efficiency  of  the 
Canadian  system  has  been  reserved  for  principal 
treatment  in  the  chapter  next  but  one.  Facts  rela 
ting  to  its  security,  on  the  contrary,  must  be  examined 
in  more  or  less  close  connection  with  the  conditions 
from  which  they  arise. 

1.  The  first  of  the  events  now  to  be  considered  is 
the  failure  of  the  "Exchange  Bank  of  Canada,"  of 
Montreal,  an  institution  chartered  in  1872.   In  August, 
1879,  it  was  obliged  to  suspend  payment,  but  resumed 
in  November;    $500,000    were  written  off  its  capital 
stock  in    1881.     The   directorate  was  wealthy,   and 
their  standing,  combined   with  manipulation  of  the 
stock,  kept  the  shares  of  the  bank  high  in  the  public 
esteem.     Within  a  year  of  the  failure  stock  was  sold 
for  $179  a  share.     But  the  management  was  bad,  and 
after  1881  it  showed  no  improvement.    In  April,  1883, 
the  bank  came  to  the  government  for  help.    A.  deposit 
of  $200,000,  bearing  interest  at  5  per  cent.,  and  pay 
able  at  thirty  days'  notice,  was  made  with  the   Ex 
change  Bank.     In  May,  $100,000  more  were  granted 
on  the  same  terms,  the  personal  security  of  one  of  the 
directors  of  the  bank,  a  Conservative  senator,  being 
taken  as  a  guarantee  of  repayment.     Over  one  half 
the  stock  was  then  owned  by  prominent  Conservatives. 
The  collapse  of  the  Northwest  boom  was  still  troub 
ling  men's  thoughts,  and  many  felt  that  the  country 
was  about  to  experience  a  serious  crisis.1     The  crisis 
might  be  precipitated  by  the  sudden  stoppage  of  a 
single  bank,  and  end  in  the  failure  of  several.2     The 
advances,  the  friends  of  the  Government  afterwards 

• 

debates,  House  of  Commons,  Canada,    1885,    pp.    382,  383,  Mr. 
White. 

*lbidt  1884,  p.  161,  Sir  Leonard  Tilley. 


Bank  Failures,  1883-1889  307 

said,  were  made  to  prevent  a  run  011  the  Exchange 
Bank,  and  so  to  ward  off  the  crisis.     The  other  side 
thought  they  might  well  have  been  made  to  enable 
friends  of  the  Government  to  escape  from  the  double 
liability  of  their  stock.     In   1885  the   Hon.   Edward 
Blake  called  the  concern  a  political   bank,  and  an 
example  of  the  disasters  awaiting  a  political  bank.1 
In    the    four  months  following  the    advances  the 
condition  of  the  bank  grew  worse   and  worse.     Ex 
cept  for  $120,000  its  liabilities  were  as  high  in  Sep 
tember  as  in  March.       More   than  the   current  rate 
was  paid  for  deposits,  money  was  borrowed  in  large 
amounts,  and  used  for  advances  of  the  most  reckless 
and  desperate  sort.     The   managing  director  of  the 
bank  appears  to  have  lacked  all   sense  of  responsi 
bility  or  honor.     With  some  of  his  colleagues  on  the 
board,  he   used  the  funds   in   his  charge  to  manipu 
late  a  block  of  1,000-1,200  shares  of  the  bank,  about 
one- quarter  of  the    whole  stock.     He  entered  other 
unlawful  and  personal  speculations,  made  entries  in 
obscure  parts  of  the  books;  and  kept  papers  pledging 
the    bank's    credit    in    his  private    drawer.2     When 
the  bank  failed    on    the    loth    September,   1883,  he 
owed  it  §226,000.     When  wanted  in  December  he  was 
not  to  be  found.3     The  total  liabilities  of  the  bank  at 
the  time   of   suspension  were  about   $2,430,000,  the 
nominal  value  of  the  assets  83,335,907.     The   notes 
for  $380,218  then  in  circulation  never  sold  for  much 
less  than    ninety    cents    on    the    street;  within   two 
months  the  liquidator  was  ready  to  pay  them,  and 
all  presented  were  ultimately  redeemed  in  full.    Upon 

debates,  House  of  Commons,  3885,  p.  378,  Hon.  Edward  Blake. 

2 Ibid,  1885,  p.  308,  Mr.  McMaster. 

zMonetary  Times,  vol.  xvii,  issue  of  the  12th  September,  1879. 


308  The  Canadian  Banking  System,  1817-1890 

the  other  debts,  after  a  capital  of  $500,000  and  a  rest 
of  $300,000  had  been  wiped  out  and  the  double  lia 
bility  of  the  shareholders  collected  from  all  who 
could  pay,  only  66i  per  cent,  was  returned  to  the 
creditors.  Their  loss  of  principal  was  thus  a  trifle 
less  than  $690,000;  that  of  the  shareholders,  at  one 
time  and  another,  may  be  estimated  at  from  $1,600,- 
000  to  $1,800,000.  But  the  shareholders  could  not 
blame  commercial  conditions,  defects  of  the  banking- 
system,  or  the  hostility  of  their  competitors,  for  the 
loss.  It  was  due  to  shameful  malversation  and  dis 
regard  of  duty  on  the  part  of  the  management.  The 
government  endeavored  to  establish  a  preferential 
lien,  for  the  collection  of  its  debt,  but  their  suit  was 
lost  because  the  common  law  priority  of  the  Crown 
did  not  exist  in  the  civil  law  of  Quebec.  The  "Ex 
change  Bank  Liquidation  Account"  still  stands  in 
the  Dominion  Balance  Sheet  for  1893,  as  an  asset  of 
$77,337,  the  cost,  less  interest,  of  Sir  Leonard  Til- 
ley's  salvation  of  the  country.  It  is  true  that  while 
the  failure  caused  great  scandal  and  indignation  in 
Canada,  it  started  no  panic.  The  prices  of  bank 
stocks  generally  were  unaffected,  the  course  of  the 
Exchange  Bank,  according  to  the  president  of  the 
Bank  of  Montreal,  having  been  known,  and  its  sus 
pension  discounted.1  The  scandal  was  aired  in  Par 
liament  in  1884,  and  resolutions  condemning  the 
advances  to  the  Exchange  Bank  were  moved  in  the 
House  of  Commons  by  prominent  Liberals.  The 
Government  received  full  measure  from  the  country's 
vial  of  wrath,  but  were  sustained  when  it  came  to  a 
vote,  by  97  against  60. 
1  Montreal  Gazette,  18th  September,  1883,  Letter  of  Mr.  Smithers. 


Bank  Failures,  1883-1889  309 

II.  The   next  failure  was    that  of  the  "Maritime 
Bank  of  the  Dominion  of  Canada,"  situated  in  St. 
John,  N.  B.     It  also  was    chartered  in  1872.     In  its 
first  eight    years    it  had    lost    nearly    $600,000,    the 
probable    reason    being    that    those    in    control,    in 
stead  of  scattering  risks,  preferred  to  make  loans  en 
bloc.     Its    president   was   described  as  a   merchant, 
manufacturer,  politician  and   banker,  a  man  of  large 
ambition  and   small    capital,   always   ready   to   play 
high,    especially    when    staked    with    the   money  of 
others.1     The  bank  was  reorganized   in   1883-4,  put 
in  more   careful  hands,   and  the   paid-up  capital  re 
duced  by  64  per  cent,   to  8247,000.     In  spite  of  the 
fact    that    large    provincial   and    Dominion   deposits 
were  made  with  the  bank,  its  subsequent  course  was 
not  prosperous.     In  1887  it  had  accounts  overdrawn 
for  $650,000,  of  which  $350,000  were  against  the  assets 
of  bankrupts.     Advances  far  in  excess  of  its  capital 
were  locked  up  in  a  series  of  lumber  accounts,  which, 
though  under  different  names,  were  really  against  a 
single  concern.     The  bank  became  a  party  to  kiting 
sterling   bills  of  exchange  in  order  to  sustain  itself. 
When  it  stopped  payment  on  the  8th  March,  1887,  its 
liabilities  were   about  81,826,000.     The   $314,000  of 
notes  in  circulation  were  the  first  charge  on  its  assets, 
and  so  far  as  presented  were  paid  in  full,  though  only 
after  more  than   two   years   were   elapsed.     On  the 
28th  February  the   Dominion  had   $70,735  deposited 
with  the  bank,  the  province  of  New  Brunswick  $205,- 
180:    each    government    succeeded   in    enforcing  the 
Crown  priority,  and  thus  escaped  practically  all  loss. 
The  other  creditors  have  been  paid  dividends  of  6  and 
3  per  cent.,  and  will  receive,  the  liquidators  say,  1 
^Monetary  Times,  vol.  xiv,  p.  418;  vol.  xv,  p.  731. 


310          The  Canadian  Banking  System,  1817-1890 

or  2  per  cent.  more.  Should  the  total  dividend 
amount  to  11  per  cent.,  the  creditors  of  the  bank  will 
have  lost  about  $750,000  of  the  principal  of  their 
claims.  Assuming  that  the  collection  of  the  double 
liability  was  fairly  successful,  the  shareholders  lost 
by  the  bank's  failure  and  the  previous  reduction  of 
stock,  a  sum  nearer  a  million  than  $950, 000. 

III.  Through   the   failure   of    some   of    its  largest 
debtors,  the  Pictou  Bank,  of  Pictou,  N.  S.,  suffered 
dangerous  lock-ups  between  1884  and  1886.  amount 
ing  to  over  $220,000. 1     No  dividends  were  paid  after 
January,  1884,  and  in  1886,  20  per  cent,  of  its  paid-up 
capital  was  written  off  by  authority  of  Parliament. 
(49  Vic.,  cap.  62.)     The   next  year  it  became  neces 
sary  to  suspend  banking  operations.     The  sharehold 
ers  secured  a  permissive  act,  and  in  September,  1887, 
the  bank  being  still  solvent,  they  voluntarily  put  it 
into  liquidation,  paid  their  debts  in  full,  and  saved 
from  30  to  40   per   cent,    of    their    reduced    capital 
($200,000). 

IV.  The   Bank  of   London  in   Canada  was   estab 
lished  in   1883.     After  a  brief  life   of  four  years  it 
suspended  payment  on  19th  August,  1887.     The  for 
tunes  of  the  bank  were  blighted  by  the  sinister  influ 
ence  of    a    speculative    president.      He   had    drawn 
largely  on  its  resources,  and  had  involved  its  funds 
with  the  affairs  of  an  insolvent  loan  company,  "The 
Ontario    Investment    Association,"    then    under    his 
control.     On  the  eve  of  completing  arrangements  for 
selling  the  business  of  the   Bank  of  London  to  the 
Bank  of  Toronto,   he   had   decamped  to  the   United 
States.    The  paid-up  capital  of  the  bank  was  $241,101. 

1  Monetary  Times,  vol.  xx,  p.  125. 


Bank  Failures,  1883-1889  311 

Some  $90,000  of  this  was  saved  after  payment  of  all 
debts  in  full. 

V.  The  liquidation  of  the  Central  Bank  of  Canada 
was  not  quite  so  creditable.     This  bank  was  another 
young  concern  chartered  in  1883.     It  suspended  pay 
ment  on  the  16th  November,  1887,  and  ceased  a  busi 
ness  which,  for  a  year  at  least,  had  been  distinctly 
discreditable.     It   placed   stock   in   towns  outside  -of 
Toronto  by  promising  to  establish  branches  if  certain 
amounts  were  subscribed  for.     It  had  pushed  busi 
ness  tending  to  increase  the  note  circulation.     It  had 
even  paid  brokers  for  help  in  keeping  out  its  issues, 
and  in  order  to  get  money  it  sold  them  certificates  of 
deposit  at  a  discount.     Its  comparatively  large  de 
posits  were  acquired  by  paying  one  or  two  per  cent, 
more  than  the  current  rate.     A  few  large  customers, 
a  clique  of  directors,  and  certain  brokers  got  advances 
utterly  out  of  proportion  to  their  credit.     Through 
their  schemes,  and  in  methods  still  more  scandalous 
and   dishonest,  the  capital  of  $500,000  and  the  pro 
ceeds    of    the    double    liability   to    nearly    an    equal 
sum,  were  wholly  sunk.     Note  holders  were  paid  in 
full;    other  creditors,   99£  per  cent.,  the    loss    thus 
inflicted  on  the  public  being  about  $14,260. 

VI.  The  last   event  of  this  series  was  a  voluntary 
liquidation  rather  than  a  bank  failure,  but  as  a  bank 
"misfortune"  it  is  most  conveniently  treated  with 
the  others. 

The  Federal  Bank  of  Canada  (originally  called  the 
Superior  Bank)  was  incorporated  in  1872,  but  did  not 
open  its  head  office  in  Toronto  until  1874.  Under 
enterprising  and  ingenious  management  the  capital 
of  the  bank  was  doubled  in  1882-83  to  $3,000,000. 
In  July,  1883,  its  stock  sold  at  150|;  on  the  26th 


312  The  Canadian  Banking  System,  1817-1890 

June  1884,  when  the  general  manager  resigned,  it 
brought  8(H.  From  the  investigation  then  made  it 
appeared  that  the  bank  held  no  less  than  6,000  shares 
of  its  own  stock.  Most  of  these  had  been  seized  as 
additional  securities  for  advances,  originally  on  over 
drawn  and  unsecured  account,  or  mere  promissory 
note,  to  the  Commercial  Loan  and  Stock  Company,  an 
inside  corporation,  which  was  used  to  borrow  the 
bank's  funds,  either  to  loan  upon  stock  in  the  Fed 
eral  or  purchase  it  in  order  to  keep  up  the  price.1  The 
scheme,  at  its  best,  was  a  highly  disreputable  evasion 
of  the  prohibition  in  the  Bank  Act  against  loaning 
on  bank  stocks.  A  run  was  started  on  the  bank  in 
the  last  days  of  June  and  the  first  week  in  July,  but 
was  successfully  met  by  help  of  the  other  banks,  who 
offered  temporary  advances  for  82,000,000,  and  made 
arrangements  for  transfers  of  discount  accounts.2 
Under  the  new  manager  appointed,  the  "little 
machine''  through  which  $600,000  of  capital  had 
been  given  fictitious  existence,  was  promptly  wound 
up.  In  1885  authority  was  secured  to  cancel  5,000 
of  the  shares  held  by  the  bank,  and  to  reduce  the 
remaining  capital  to  $1,250,000,  on  account  of  losses 
from  Michigan  lumber  transactions  and  loans  in 
Manitoba.  (48  and  49  Vic.,  cap.  8.)  In  spite  of  such 
drastic  treatment,  the  Federal  Bank  did  not  recover 
its  prosperity,  or  the  full  confidence  ordinarily  placed 
by  the  public  in  its  banking  institutions.  Bank 
stocks  fell  generally  in  the  autumn  of  1887,  and  the 
Federal  dropped  below  par.  The  bank  was  thus  dis 
credited,  and  between  the  31st  October  and  the  25th 
January  its  situation  again  became  critical.  It  had 

^Monetary  Times,  vol.  xviii,  pp.  571,  576. 
-  Ibid,  p.  576. 


Bank  Failures,  1883-1889  313 

been  called  on  to  pay  $210,693  of  notes,  and  $1,421,- 
393  of  deposits,  a  total  drain  of  $1,632,085. 

Representatives  of  the  banks  having  offices  in 
Toronto  met  upon  the  Federal's  case,  and  examined 
the  condition  of  its  assets.  As  the  result  of  this 
examination  they  offered  to  advance  enough  money 
to  pay  off  the  entire  liabilities  of  the  bank,  and  to 
wait  for  repayment  from  the  liquidation  of  its 
assets,  on  condition  that  the  bank  should  be  wound 
up  with  open  doors.  The  step  was  decided  on  be 
cause  the  condition  of  the  bank's  affairs  was  found 
to  be  such  that  its  continuance  in  business  was  not 
possible,  and  because  the  plan  proposed  and  finally 
adopted  would  avoid  the  panic  which  the  Federal's 
suspension,  after  the  uneasiness  due  to  the  Central 
and  London  failures,  was  likely  to  cause.  The 
amount  of  the  contribution  agreed  upon  was 
$2,700,000.  By  this  undertaking  they  ran  the  risk 
of  being  forced  to  reduce  their  reserves  to  a  point 
beyond  that  ordinarily  thought  safe.  But  Canadian 
bankers  believe  that  a  reserve  is  for  use  rather  than 
display.  Their  prompt  and  courageous  use  of  their 
ready  cash  at  this  juncture,  undoubtedly  prevented 
conditions  in  which  thrice  or  four  times  the  amount 
of  their  reserves  would  have  been  needed  to  still 
the  popular  clamor  for  payment.  It  saved  the 
shareholders  of  the  Federal  bank  from  the  sacri 
fices  of  a  compulsory  liquidation,  and  allowed  them 
to  realize  their  assets  at  the  most  advantageous 
times,  and  lastly,  it  protected  the  business  of 
Ontario  from  the  costly  derangement  incident  to 
a  banking  panic,  and  a  sudden  contraction  of 
discounts. 


314          The  Canadian  Banking  System,  1817-1890 

Here  ends,  for  the  present,  the  account  of  bank 
failures    in    Canada.       If    any    conclusion    may    be 
drawn  from  the  study,  it  is  that  the  disasters  have 
been  due  to  faults  of  practice,   rather  than  defects 
in  the  system.     It  is  clear  that  legislation,  scienti 
fically  framed,  has  not  prevented  poor  management, 
bad  management,  or  fraud.     No  one,  probably,  ever 
expected  it  would.     It  is  clear  also  that  it  has  not 
saved  shareholders  from  loss.      A  careful    estimate 
shows  that,    by    reductions  of    capital,  liquidations, 
failures,  and    contributions  on  the  double    liability, 
shareholders    have    sunk    at    least    $23,000,000     in 
Canadian    banking    since    the    first    of    July,    1867. 
This  sum,   more  than    37    per  cent,   of    the    present 
paid-up  banking  capital,  is  independent  of  the  losses 
provided  for  out  of  profits,  or  met  by  reduction  of 
rests.     The  security  of  a  group  of  banks,  however, 
must  be  judged,  not  by  the  losses  of    their  propri 
etors,  but  by  those  of  their  creditors.     We  may  see 
now  how  well  the  Canadian  system  has  minimized 
the  creditors'   risks.      Out    of    56    chartered    banks, 
some  time  in  operation  in  Canada  since  the  first  of 
July,  1867,  just  38  survive.     Ten  of  those  gone  be 
fore  have  failed.      But  the    total    loss    of    principal 
inflicted   during  twenty-seven  years  on  noteholder, 
depositor,  government,   or  creditor  whomsoever,  has 
not  exceeded  82,000,000,  or  less  than  one  per  cent, 
of  the  total    liabilities   of    Canadian    banks   on    the 
30th  day  of  last  June. 


CHAPTER  IX 
THE  REVISION  OF  1890 

§50. DEMANDS  FOR  REFORM  AND  THEIR  CAUSES 

BEFORE  the  time  for  renewing  the  charters  for  an 
other  ten  years  was  arrived,  criticism  of  the  Canadian 
banking  system  as  amended  in  1880  and  1883,  had 
pointed  out  several  unqualified  defects. 

I.  One  of  those  which  most  affected  the  general 
public,  and  prompted  the  demands  for  reform  coming 
from  that  quarter,  was  the  discount  on  the  notes  of  a 
failed  bank,  in  the  interim  between  its  suspension 
and  the  beginning  of  its  liquidation.  Though  by  the 
prior  lien  given  to  note  holders,  final  payment  in  full 
was  certain,  it  was  not  always  definite.  If  he  wished 
to  realize  immediately  after  the  failure,  the  last  holder 
of  the  note  during  its  currency  was  forced  to  submit 
to  a  discount.  Although  the  liquidators  were  ready 
to  redeem  within  a  month,  the  discount  on  the  notes 
of  the  Exchange  Bank  after  its  failure  rose  as  high 
as  five  or  ten  per  cent.  Redemption  of  the  notes  of 
the  Maritime  Bank,  though  finally  in  full,  was  de 
layed  for  nearly  three  years  after  the  failure,  and  in 
the  meanwhile  its  issues  sold  for  as  low  as  forty  cents 
on  the  dollar.1  In  notes  of  the  Central  Bank  of  Can 
ada,  Americans  near  Sault  Ste.  Marie  found  a  profit 
able  speculation  by  buying  them  up  after  the  failure, 
at  10  per  cent,  discount. 

1  Montreal  Gazette,  27th  February,  1890. 


316  The  Canadian  Banking  System,  1817-1890 

II.   Another  cause  of  complaint  was  the  operation 
of  the  statute  of  limitations,  or  the  law  of  prescrip 
tion,  upon  the  outstanding  notes  of  a  liquidated  bank. 
The  winding-up  acts  passed  by  Parliament  ordinarily 
required  the  liquidators  of  a  bank  which  had  failed, 
or  decided  to  retire  from  business,  to  make  all  reason 
able  efforts  to   call  in   and   redeem  the  outstanding 
liabilities.     Reserved    dividends    sufficient    to    cover 
any  undischarged  and  unclaimed  debts,  were  required 
to  be  deposited  at  interest  with  some  trustee,  ordinarily 
a  bank.     After  two,  or  three,  or  five,  or  ten   years, 
and  a  month's  notice  in  the   Canada  and  provincial 
Gazettes,  as   well  as   in   a  newspaper  of  each  place 
where  the   bank  had  an  agency,  it  was  allowable  to 
distribute  the  surplus  of  this  fund,  together  with  the 
accrued  interest,  among  the  shareholders.     Thence 
forward,   both  notes    and    other    claims   against  the 
bank  were   barred   and  extinguished.     Such  a  time 
limit  was  quite  too  brief.     It  worked  injustice  to  those 
holders  of  notes  who  were  unmindful,  or  ignorant  for 
the  time  being,  of  the  character  and  life  of  the  cur 
rency  in  their  possession.     The  notes  of  a  bank  were 
never  entirely  called   in   before  the  limitation  came 
into  effect.     In  1882,  sixteen  years  after  the  failure 
of  the  Bank  of   Upper   Canada,  843,301  of   its  notes 
were  still  outstanding.     $39,000  had  been  redeemed 
by  the  government  in  the  twelve  years  after  1870. 1 

III.  Of  a  third  defect  in  the  currency,  some  notice 
was  taken  in  1869,  when  Sir  John  Rose  proposed  reg 
ulations  to  make  it  circulate  at  par  in  every  part  of 
the  country.  Down  to  1889,  Canadian  bank  notes 
lacked  that  quality.  Although  the  bank  was  required 
to  receive  its  own  notes  at  any  of  its  offices,  it  was 
'Sessional  Papers,  Canada,  1882,  108a. 


Demands  for  Reform  and  their  Causes  317 

obliged  to  pay  them  only  at  offices  where  they  were 
made  payable,  one  of  such  offices  being  always  the 
bank's  principal  seat  of  business.  Some  banks  dated 
part  of  their  issue  at  branches,  others  did  not.  That 
was  a  mere  question  of  book-keeping,  some  managers 
desiring  such  a  test  for  the  profits  of  branches  by  cir 
culation  and  others  not  esteeming  it.  In  any  case, 
the  notes  of  a  bank  without  a  branch  in  the  neigh 
borhood  did  not  circulate  at  their  par  value  in  localities 
remote  from  the  offices  where  they  were  payable,  or 
in  localities  whose  trade  center  was  different  from 
that  of  the  bank  whence  they  were  issued.  As  com 
munication  between  them  became  easier,  as  a  larger 
trade  grew  up,  and  closer  relations  in  all  ways  were 
established  between  the  eastern,  central  and  western 
provinces,  a  larger  number  of  bank  notes  appeared 
in  the  circulation  of  places  distant  from  their  domi 
cile.  Occasion  for  the  discount  for  geographical 
reasons  arose  more  frequently,  and  the  annoyances 
from  it  were  rather  aggravated. 

The  public  sense  of  the  first  two  defects  in  the  cir 
culating  medium  was  undoubtedly  quickened  by  the 
bank  troubles  of  1883,  1887,  and  1888,  and  since  the 
stock  example  of  an  issue  secured  by  bonds  is  open 
to  none  of  the  three  criticisms,  the  desire  of  the  peo 
ple  for  reform  was  strengthened  by  their  comparisons 
of  Canadian  bank  notes  with  those  circulating  in  the 
United  States.  In  each  case,  as  the  Minister  of  Fin 
ance  remarked  of  the  last,  there  was  *  'a  well  founded 
desire  that  such  an  anomaly  should  cease."1 

IV.  A  second  lesson,  emphasized  for  all  observers 
by  the  suspension  of  two  banks  chartered  in  1883, 
was  the  failure  of  the  Bank  Act  to  exact  what  Sir 

debates,  ut  supra,  1890,  p.  2235. 


318  The  Canadian  Banking  System,  1817-1890 

Francis  Hincks  had  termed  "the  security  of  a  large 
paid-up  capital."  It  was  too  easy  to  get  a  charter 
for  a  proposed  bank,  and  the  requirement  of  $100,000 
of  paid-up  capital  before  the  beginning  of  business 
was  too  slight  a  barrier  round  the  field  of  joint-stock 
banking  to  prevent  the  entrance  of  speculators  and 
untrustworthy  adventurers. 

Y.  The  beginning  of  a  movement  on  still  different 
lines  was  what  an  American  politician,  speaking  of 
the  revision  of  1890,  would  call  the  first  gun  of  the 
campaign.  In  the  annual  meeting  of  its  shareholders 
on  the  1st  June,  1885,  Mr.  Smithers,  president  of  the 
Bank  of  Montreal,  gave  new  expression  to  the  favor 
with  which  the  officers  of  that  institution  had  long 
regarded  the  plan  to  secure  bank  notes  by  the  deposit 
of  government  bonds.  Premising  that  his  directors 
were  in  accord  with  him,  he  said:  "I  am  prepared  to 
advocate  the  policy  of  putting  the  banks  on  the  Amer 
ican  system,  and  requiring  them  to  secure  their 
issues  by  a  deposit  of  government  bonds.  It  was  not 
pressed  at  the  last  revision,  not  because  the  Bank  of 
Montreal  was  not  quite  ready  for  the  change,  but  out 
of  consideration  for  the  views  of  other  bankers.  It 
would  do  away  with  the  necessity  for  the  volumin 
ous  statements,  for,  if  the  safety  of  the  currency  was 
fully  assured,  all  the  statements  required  could  be 
furnished  in  half  a  dozen  lines,  as  I  hold  that,  when 
the  government  has  provided  the  country  with  a 
thoroughly  sound  currency,  its  duty  is  discharged.  I 
maintain  that  it  is  the  duty  and  privilege  of  every 
man  to  look  around  and  satisfy  himself  as  to  the 
bank  he  will  deposit  his  money  in.  *  *  *  *  The 
same  is  true  of  the  shareholder  in  selecting  his  in 
vestments. 


Discussion  Preceding  Parliamentary  Action          319 

It  may  be  said  that  the  people  of  the  United 
States  are  looking  round  for  a  substitute  for  the 
JSTatiorial  Banking  Law,  but  if  they  are,  it  is  not  be 
cause  it  has  not  been  a  success,  but  because  the  sup 
ply  of  bonds  is  likely  to  run  out;  a  contingency  which 
is  not  likely  to  arise  in  this  country  for  some  time  to 
come."  Ten  days  later  the  project  was  effectively 
disposed  of.  so  far  as  reason  and  expediency  were 
concerned,  by  an  editorial  in  the  Toronto  Week,  pre 
sumably  from  the  pen  of  Professor  Goldwin  Smith. 
The  general  manager  of  the  Merchants'  Bank  of 
Canada,  Mr.  George  Hague,  also  answered  it  at  the 
annual  meeting  of  his  bank  on  the  18th  June.2 


§51. DISCUSSION  PRECEDING  PARLIAMENTARY  ACTION 

I.  For  a  longtime,  no  amount  of  argument  appeared 
to  shake  the  faith  of  the  advocates  of  bond  secured 
circulation.  In  1890,  for  instance,  the  president  of 

^Monetary  Times,  vol.  xviii,  p.  1365. 

2Monetary  Times,  vol.  xviii,  p.  1427. 

In  his  reply,  however,  Mr.  Hague  provisionally  suggested  as  a 
cure  for  unsound  banking,  regulations  similar  to  Sir  Robert  Peel's 
treatment  of  the  Scotch  and  Irish  banks  in  1845.  Now  the  princi 
ples  underlying  Peel's  restrictions  of  1845  were  those  on  which  he 
framed  the  Bank  Act  of  1844.  The  Bank  of  Montreal  wanted  cur 
rency  regulation  similar  to  that  in  force  in  the  United  States.  But 
the  National  Bank  Act  of  that  country  was  modelled  after  the  "  free 
banking"  laws  of  the  state  of  New  York,  the  identical  statutes 
that  were  copied  in  drafting  the  Canadian  "Act  to  Establish  Free 
dom  of  Banking,"  etc.,  of  1850.  That  measure  was  supported  in 
the  Montreal  Pilot,  then  the  organ  of  Mr.  Francis  Hincks,  as  a  step 
in  the  direction  of  Sir  Robert  Peel's  policy.  The  system,  it  was 
urged,  is  "  as  near  in  principle  a  bank  of  issue  as  the  circumstances 
and  position  of  the  country  will  permit."  So  far  as  it  related  to  the 
currency,  therefore,  Mr.  Hague's  proposal  was  hardly  different  in 
theory  from  the  plan  which  he  opposed. 


320  The  Canadian  Banking  System,  1817-1890 

the  Bank  of  Montreal,  Sir  Donald  Smith,  pronounced 
the  opinion  that  the  "true  system  of  banking  for  this 
country  would  be  very  much  that  which  has  worked 
so  well  on  the  other  side  of  the  line,  that  is,  that 
each  bank  should  guarantee  its  own  circulation."1 
The  proposal  of  Mr.  Smithers  seems  to  have  been 
advanced  in  the  belief  that  its  adoption  would  pre 
vent  the  formation  of  small  weak  banks;  the  attitude 
of  two  of  the  banks  in  1890  is  best  explained  by  their 
unwillingness  to  assist  in  securing,  through  the  Bank 
Circulation  Redemption  Fund,  not  their  own  notes, 
but  those  of  other  banks,  especially  of  the  smaller  or 
weaker  institutions.  The  fund,  as  we  shall  see,  was 
calculated  to  invest  the  notes  of  the  latter  with  prac 
tically  the  same  credit  as  the  public  attached  to  the 
paper  of  the  strongest  or  largest  banks. 

II.  The  newspapers  took  up  the  question  early  in 
1889,  discussing  and  emphasizing  all  the  points  de 
tailed  in  the  preceding  section.  In  order  to  the  ab 
solute  security  of  the  currency,  and  its  circulation  at 
par  all  over  the  country,  some  of  them  favored  the 
introduction  of  the  American  plan.  The  policy  was 
supported  with  particular  insistence  by  the  Montreal 
Gazette,  in  a  series  of  leading  articles  appearing 
from  time  to  time  in  1889.  Besides  the  ordinary 
arguments  for  covering  bank  notes  by  bonds  to  their 
full  amount,  the  Gazette  presented  possible  modifica 
tions  of  the  scheme,  described  the  device  for  giving 
elasticity  by  means  of  maximum  deposits,  advocated 
the  requirement  of  a  minimum  reserve,  dwelt  on  the 
financial  advantages  had  by  the  government  under 
the  American  system,  and  argued  that  "it  was 

aGarland,  "  Banks,  Bankers  and  Banking  in  Canada,"  p.  307. 


Discussion  Preceding  Parliamentary  Action  321 

favored  by  many  of  the  larger  banks."1  The  posi 
tion  taken  by  this  journal  was  strongly  opposed,  and 
most  of  its  arguments  successfully  demolished,  by  a 
number  of  excellent  journals  in  which  another  view 
of  the  banking  question  was  taken. 

III.  On  the  15th  December,  1888,  a  circular  letter 
was  addressed  by  the  head  of  one  of  the  Ontario 
banks  to  a  number  of  the  other  banks  of  the 
Dominion.  After  referring  to  the  causes  of  the 
criticism  generally  passed  on  the  bank  note  currency, 
the  author  of  the  circular  suggested  that  if  they 
desired  to  retain  their  powers  of  issue,  it  would  be 
expedient  for  the  banks  not  only  to  organize,  but 
also,  toward  disarming  their  critics,  to  prepare 
against  the  time  for  renewal  of  charters  any  pro 
posals  for  reforming  the  banking  system  upon  which 
they  could  agree.  Then  followed  the  outlines  of 
plans  to  keep  bank  notes  at  par,  however  far  they 
might  be  from  the  place  of  issue,  and  to  establish  a 
safety  fund,  contributed  from  all  the  banks,  whereby 
to  ensure  prompt  and  full  redemption  to  the  holders 
of  notes  of  a  suspended  bank.  At  various  times  in 
1889,  most  of  the  banks  in  different  provinces  com 
pleted  arrangements  to  carry  out  the  first  sugges 
tion.  The  banks  usually  worked  towards  the  pur 
pose  in  twos,  each  engaging  to  perform  the  service 
of  redeeming  the  other's  notes  in  its  own  neighbor 
hood,  on  consideration  of  a  like  service  by  the  other 
in  its  district.  On  the  notes  of  banks  who  became 
parties  to  redemption  agreements,  this  simple  device 
quite  prevented  the  discount  for  geographical  reasons. 

Upon  the  llth  January,  1890,  the  representatives 
of  the  chartered  banks  met  in  Montreal  and  resolved 

1  Vide  Montreal  Gazette,  27th  November,  1889. 

21 


322  The  Canadian  Banking  System,  1817-1890 

to  request  an  interview  with  the  Hon.  George  E. 
Foster,  D.  C.  L.,  who,  as  Minister  of  Finance  and 
Receiver  General,  had  charge  of  the  banking 
measures  of  the  Government.  Their  request  was 
granted.  On  the  25th  the  representatives  of  twenty- 
four  banks  met  the  Minister  in  Ottawa.  The  minutes 
of  this  meeting,  and  of  the  subsequent  meetings  on 
the  llth  and  12th  February,  if  any  were  kept,  have 
never  been  published,  and  neither  from  newspapers 
of  the  day,  nor  from  public  documents,  is  it  possible 
to  learn  just  what  occurred  at  them.  It  is  under 
stood,  however,  that  at  the  first  meeting,  the  bankers 
inquired  the  intentions  of  the  Government  with 
respect  to  the  Bank  Act  revision,  and  that  the 
Minister,  while  refusing  to  make  such  an  announce 
ment  at  that  time,  expressed  his  willingness  to  learn 
their  views  on  certain  points.  Among  these  appear 
to  have  been  the  questions: 

(a)  of  making  the  Bank  Act  a  permanent  statute, 
and  thus  avoiding  a  revision  every  decade; 

(b)  of  preventing  the  discount  on  the  current  notes 
of  a  solvent  but  distant  bank; 

(c)  of  preventing  any  discount  whatsoever  on  the 
notes  of    a  bank,   whether  it   be   solvent,   awaiting 
liquidation,    or    liquidated,    or    in    other    words,    of 
improving  the  security  of  bank  notes  ; 

(d)  of  further  limiting  its  powers  of  circulation  to 
60  or  70  per  cent,  of  each  bank's  paid-up  capital,  or 
to  the  average  amount  of  notes  outstanding  during 
the  three  years  preceding  ; 

(e)  of  fixing  the  minimum  proportion   which   the 
cash  reserve  of  a  bank  shall  bear  to  its  liabilities; 
and 

(/)  of  requiring  a  larger  paid-up  capital  for  new 
banks. 


Discussion  Preceding  Parliamentary  Action  323 

In  regard  to  the  second  point  (b),  the  bankers 
remarked  the  arrangements  already  made  for  that 
purpose,  and  expressed  a  wish  that  the  Bank  Act 
should  require  every  bank,  on  pain  of  forfeiting  its 
charter,  to  make  arrangements  for  the  redemption  of 
its  notes  at  par,  in  the  commercial  center  of  each 
province.  To  oblige  each  bank,  after  the  American 
plan,  to  receive  at  par  the  notes  of  other  banks  of 
the  system,  would  be  unjust,  for  the  duty  of  redemp 
tion  ought  to  fall,  not  upon  its  competitors,  but  upon 
the  bank  which  gains  from  the  circulation.  As  to 
the  last  (/),  in  common  with  the  rest  of  the  country, 
they  thought  that  more  substantial  guarantee  should 
be  required  from  bank  promoters.  To  the  fourth  (d), 
that  of  further  limiting  the  powers  of  circulation, 
they  probably  objected.  Among  those  represented 
were  many  banks  with  an  active  business  of  the  sort 
which  requires  large,  though  fluctuating  amounts  of 
currency,  and  for  them  the  restriction  would  work 
hardship.  Then,  too,  were  they  to  be  restricted  to 
the  average  of  the  past  three  years,  many  banks 
would  be  disabled  for  meeting  the  periodical  expan 
sion,  and  obliged  to  close  some  of  their  agencies. 
The  first  point  was  a  matter  of  detail,  and  judging 
from  the  bill  he  brought  down  was  soon  rejected  by 
the  Minister  himself. 

The  question  of  requiring  a  fixed  reserve  was  dis 
cussed  in  connection  with  increased  security.  So 
far,  the  Government  had  given  no  indications  of  a 
purpose  at  this  revision  to  require  deposits  of  bonds 
against  the  note  issue.  But  as  everyone  afterwards 
learned,  Mr.  Foster  was  strongly  in  favor  of  obliging 
each  bank  to  hold  a  sum  of  specie  and  Dominion  notes 
which  should  never  be  less  than  10  per  cent,  of  the 


324          The  Canadian  Banking  System,  1817-1890 

amount  of  its  debts.  Newspaper  writers  had  favored 
the  proposal  as  likely  to  keep  such  a  stock  of  specie 
in  the  bank,  that,  in  case  it  should  fail,  there  would 
be  still  enough  for  the  redemption  of  notes  as  fast  as 
they  might  come  in.  The  rule  of  a  fixed  reserve  had 
been  adopted  by  the  United  States,  and  a  number  of 
the  great  European  banks  were  subject  to  restrictions 
with  respect  to  the  proportion  of  specie  held  against 
outstanding  notes.  For  a  long  time,  moreover,  four 
or  five  of  the  Canadian  banks  had  incurred  just  criti 
cism  for  allowing  their  reserves,  not  merely  of  money, 
but  also  of  the  more  liquid  assets,  to  remain  below 
the  point  which,  from  the  practice  of  other  banks, 
seemed  safe  or  prudent. 

We  know   that   the  same  arguments  against  the 
measure   as   convinced   Sir   Francis    Hincks    twenty 
years  before,  were   presented  to  Mr.   Foster.1     The 
bankers'  case  was  strengthened  by  reference  to  the 
experience    of  the    American    banks    with    such    a 
requirement   since   1870.     They   could    point    to   the 
repeated  violation  of  the  law  to  which  the  national 
banks  had  been  forced,  and  at  which  the  authorities 
could  only  connive.    They  could  show  how  it  induced 
extreme  fluctuations  in  the  interest  rate  at  the  finan 
cial  centers,  how  it  hampered  that  annual  westward 
movement  of  currency  on  which  Americans  chiefly 
relied  for  elasticity  in  their  money  system,   how   it 
crippled  the  powers  of  the  banks  at  critical  moments, 
and  caused  greater 'instability  in  the  organization  of 
credit.     That    the    reserve    requirement   had    forced 
some  American  bankers  to  keep  a  provision  for  their 
liabilities  approximately  adequate,  would  nowise  have 

George    Hague,    "Bank    Reserves,"   Journal  of  the   Canadian 
Bankers'  Association,  vol.  i,  p.  107. 


Discussion  Preceding  Parliamentary  Action  325 

damaged  the  Canadian  arguments.  The  American 
banks  were  local,  numerous  and  comparatively 
small ;  in  not  a  few  cases,  either  the  desire  or  ability 
to  carry  on  sound  banking  was  correspondingly 
slight.  In  framing  the  National  Bank  Act,  the 
elasticity  of  the  currency  had  been  sacrificed  for  its 
security,  the  establishment  of  a  scientific  banking 
system  for  the  success  of  a  financial  expedient.  That 
the  fixed  reserve  was  of  qualified  benefit  under  one 
system,  was  no  reason  for  transferring  it  to  another, 
different  in  traditions,  principle  and  practice. 

In  subsequent  contention  against  the  proposal  of 
the  Minister  of  Finance,  the  bankers  urged  that  it 
was  peculiarly  unsuited  to  Canadian  conditions.  In 
Canada  the  customer  is  expected  to  keep  his  account 
with  but  one  bank.  At  the  beginning  of  his  year 
he  makes  a  confidential  exhibit  of  his  financial  con 
dition,  and  obtains  a  "line  of  credit,"  i.  e.,  the  bank's 
assurance  that  up  to  the  amount  fixed,  his  position 
remaining  satisfactory,  it  will  find  him  in  funds  as 
they  are  needed.  It  frequently  happens  that  at  no 
time  in  the  year  does  the  borrower  avail  himself  of 
the  whole  of  his  credit.  But  the  duty  "to  take  care 
of  its  customers,"  places  the  bank  under  large  obli 
gations  to  advance  money  at  times  which  it  cannot 
exactly  forecast.  Exceptional  conditions  of  trade, 
unusually  late  opening  of  navigation,  stringency  in 
the  money  market,  or  a  variety  of  other  complica 
tions,  often  cause  large  groups  of  customers  to  need 
the  entire  amount  of  their  credits,  and  sometimes  a 
little  more,  to  carry  them  through.  Or  again,  pro 
duce  buyers,  grain  shippers,  farmers  and  dairymen 
require  of  the  bank  enjoying  their  custom  larger 
advances  at  one  season  than  at  another,  and  in 


326  The  Canadian  Banking  System,  1817-1890 

different  years  amounts  which  vary  according  to 
the  success  of  the  season's  work.  Or  once  more,  as 
happened  at  the  time  of  the  Federal  Bank's  difficul 
ties,  it  sometimes  becomes  desirable,  nay  necessary, 
to  make  sudden  and  heavy  outlays  of  hard  cash  in 
order  to  avert  a  serious  panic. 

Under  the  law  of  1880,  all  these  contingencies 
could  be  met  by  the  banks  without  other  disturb 
ance  or  evil  than  a  temporary  reduction  of  their 
reserves  to  a  point  comparatively  low.  But  with 
the  requirement  of  a  minimum  reserve  a  bank  might 
be  obliged  to  look  out  for  its  cash  and  let  the  customer 
go  to  the  wall.  It  would  be  forced  to  hold  a  useless 
amount  of  money  during  nine  months  of  the  year, 
or  forego  accommodating  during  three  months  the 
agricultural  industries  relying  on  its  support.  And 
in  times  of  impending  trouble,  the  banks  would  have 
to  choose  from  the  double  dilemma,  to  take  the  wise 
and  courageous  course  of  forestalling  difficulty,  and 
deliberately  break  the  law;  or,  on  the  other  hand,  to 
maintain  their  reserves  and  endure,  with  Mahometan 
indifference,  the  harm  needlessly  suffered  by  them 
selves  and  by  the  country. 

Such  were  the  arguments  used  by  the  bankers 
against  an  arbitrary  fixed  reserve.  As  a  better 
scheme,  they  proposed  the  formation  of  a  safety 
fund,  under  regulations  very  like  those  ultimately 
adopted  by  the  government. 

But  Mr.  Foster  was  not  convinced  by  their  argu 
ments.  The  representatives  of  the  chartered  banks 
then  appealed  to  the  Privy  Council  for  a  hearing. 
This  was  accorded,  and  on  the  22d  February,  the 
eighteen  members  of  the  Government  assembled  to 
be  addressed  by  the  representatives  of  the  chartered 


Reforms  Adopted  by  Parliament  327 

banks,  for  whom  Messrs.  Geo.  Hague,  B.  E.  Walker, 
and  Thomas  Fyshe  acted  as  spokesmen,  the  burden 
of  the  argument  being  sustained  by  Mr.  Walker.1 
Once  again,  their  case  against  an  arbitrary  reserve 
was  argued,  and  at  this  trial  the  bankers  won. 
The  resistance  they  had  offered  to  the  measure  was 
earnest,  strenuous,  united.  It  may  have  been  selfish, 
but  it  was  a  case  where  the  interest  of  the  banks 
was  that  of  the  people.  Defeated  in  the  Council 
Chamber,  they  would,  no  doubt,  have  raised  the 
issue  in  Parliament,  fought  it  through  the  press,  and 
carried  it  before  the  country.  Fortunately,  however, 
the  banks  had  no  need  to  use  their  excellent  organ 
ization  and  wide  influence  in  a  general  election.  Sir 
John  Macdonald,  and  his  colleagues,  adopted  the 
views  presented  by  the  bankers,  and  the  bill  which 
Mr.  Foster  proposed  to  the  House  of  Commons  on 
the  20th  March,  1890,  contained  no  mention  of  a  fixed 
reserve. 


§52. — REFORMS    ADOPTED    BY    PARLIAMENT 

The  debate  upon  this  banking  measure  forms  one 
of  the  most  admirable  chapters  in  the  history  of 
Canadian  legislation.  The  description  noway  implies 
that  former  discussions  in  the  House  of  Commons 
were  marred  by  extreme  ignorance  or  excessive  par 
tisanship;  since  the  Dominion  Parliament  first  met, 
its  action  upon  matters  relating  to  banking  has  been 
open  to  such  criticism.  But  now  a  bill,  to  which 
long  study  and  the  attention  of  the  ablest  experts  in 

:The  Week,  Toronto,  29th  September,  1893,  "A  Bit  of  Canadian 
History."  An  account  of  the  argument  before  the  Privy  Council 
by  J.  T.  P.  K.,  a  Halifax  bank  manager. 


328  The  Canadian  Banking  System,  1817-1890 

Canada  had  already  been  given,  was  presented  to 
a  House  comprising  many  of  the  first  men  of  the 
country  in  law,  commerce,  and  public  life.  Using 
all  the  resources  of  their  rich  experience  and  excel 
lent  theoretical  equipment,  they  took  up  the  question 
without  a  trace  of  party  feeling,  and  earnestly,  ably, 
thoroughly  worked  to  bring  the  Bank  Act  as  near 
as  might  be  to  the  perfection  of  a  scientific  ideal. 

As  he  presented  the  bill  the  Minister  of  Finance 
reviewed  the  banking  legislation  in  force  at  different 
times  since  1867,  and  outlined  the  objections  held  by 
the  Government  to  the  several  plans  suggested  for  the 
revision.  The  first,  for  the  Dominion  to  assume  the 
whole  of  the  circulation,  involved  with  the  duty  of 
redemption,  responsibilities  too  difficult,  delicate  and 
dangerous.  The  second,  for  the  government  to 
guarantee  the  circulation  to  the  country,  require  the 
banks  to  deposit  debentures  with  them  for  a  certain 
percentage  of  their  issues,  and  to  retain  the  first  lien 
against  their  assets,  would  place  the  government 
under  a  heavy  contingent  liability,  which  they  might 
not  at  all  times  be  able  to  meet.  The  third  plan,  to 
require  bond  and  security  for  the  whole  circulation, 
was  inexpedient;  it  would  reduce  the  capital  used 
for  the  progress  and  development  of  the  country. 
The  fourth  plan,  the  plan  which  the  Government  had 
adopted,  was  to  keep  the  existing  system,  but  to 
improve  it,  obviate  the  objections  and  difficulties,  and 
establish  new  safeguards.1 

The  fate  of  the  proposal  for  a  fixed  reserve  was 
shared  to  some  extent  by  two  other  improvements 
suggested  by  the  Minister  of  Finance.  They  were 
severely  criticised  in  Parliament,  and  either  with- 

1  Debates  of  the  House  of  Commons,  Canada,  1890,  p.  2235  et  seq. 


Reforms  Adopted  ly  Parliament  329 

drawn  or  modified.  The  one  withdrawn  was  a 
project  for  an  audit  system,  not  of  the  government — 
but  yet  compulsory — an  audit  of  the  shareholders. 
The  machinery  was  described  by  Mr.  Foster  thus: 
"The  shareholders  shall,  at  their  annual  meeting, 
elect  two  or  more  auditors;  those  auditors  shall, 
during  the  year,  have  the  opportunities  which  are 
necessary  for  an  auditing  of  all  the  accounts  and  all 
statements;  that  they  shall  present  this  report  and 
their  audit  of  the  director's  report  at  the  yearly 
meeting-,  and  that  a  copy  of  this  shall  be  lodged  with 
the  Minister  of  Finance  and  Receiver  General." 
Against  this  it  was  successfully  objected  that  it  is 
impracticable  for  an  auditor  to  ascertain  the  value 
and  character  of  a  bank's  discounts,  that  his  inspec 
tion  provides  no  efficient  check,  that  the  public  may 
be  lulled  into  security  by  unjustified  faith  in  the 
reliability  of  the  auditor's  statement,  that  inspection 
is  a  question  for  a  bank's  administration,  and  not  for 
the  government,  and  that  the  audit  was  an  answer 
to  no  general  demand. 

I.  The  modified  clause  originally  required  from 
each  bank  an  annual  return  of  dividends  unpaid  for 
five  years,  or  balances  due  to  whomsoever  in  respect 
to  which  no  transaction  had  occurred,  or  on  which 
no  interest  had  been  paid  during  the  five  years  pre 
ceding.  The  statement  was  to  set  forth  the  name 
and  last  known  address  of  the  shareholder  or  credi 
tor,  the  amount  due  and  the  date  and  agency  at 
which  the  last  transaction  took  place.  Dividends 
unpaid  and  balances  unclaimed  for  three  years  after 
the  first  report  on  them,  were  to  be  paid  to  the  Min 
ister  of  Finance  for  the  public  uses  of  Canada,  sub 
ject,  however,  to  the  right  of  a  person  establishing 


330  The  Canadian  Banking  System,  1817-1890 

his  claim  to  the  satisfaction  of  the  Treasury  Board, 
to  be  repaid  the  principal  of  the  sum  due  him,  and, 
in  case  it  were  payable  by  the  bank,  the  interest 
thereon  at  3  per  cent,  for  not  more  than  six  years 
after  the  transfer  of  the  amount  from  the  bank  to 
the  government1 

The  argument  for  the  introduction  of  the  provision 
had  been  skillfully  and  strongly  prepared  by  a  mem 
ber  of  the  permanent  staff  of  the  Finance  Depart 
ment.  It  was  shown  that  in  India,  the  Barbadoes 
and  some  of  the  Australian  colonies,  unclaimed  bal 
ances  in  certain  cases  go  to  the  state.  Dividends  of 
the  Bank  of  England  unclaimed  for  ten  years  are 
applied  to  the  payment  of  the  national  debt.  In  the 
Cape  of  Good  Hope  Colony  the  law  was  almost 
identical  with  that  proposed.  The  Montreal  Board 
of  Trade  had  adopted  resolutions  in  April,  1889, 
calling  for  a  return  to  the  government  of  unclaimed 
debts  owed  by  trustees  and  other  depositors.  It  may 
have  been  a  popular  notion  that  the  banks  held  vast 
sums  which  they  never  expected  to  pay,  because  the 
existence  of  the  debts  being  forgotten  or  unknown, 
no  one  would  come  to  collect  them.  The  Government 
certainly  believed  that  the  heirs  of  persons  who  were 
moved  away  from  the  place  where  they  made  the 
deposits  or  subscribed  to  stock,  were  often  prevented 
from  enforcing  their  rights  by  ignorance  of  their 
existence.  As  a  matter  of  fact,  page  after  page  of 
accounts  in  the  bank  ledgers  show  balances  ranging 
from  one  cent  to  ten  dollars,  with  the  majority  of 
sums  less  than  two  dollars.  Every  effort  to  close 
them  up  having  been  unsuccessful,  the  banks  were 
obliged  to  carry  forward  the  accounts  from  folio  to 

'Bill  No.  127, 1890,  An  Act  respecting  Banks  and  Banking,  89  (1-3). 


Reforms  Adopted  ~by  Parliament  331 

folio  in  order  to  balance  the  books.  As  debts  due  to 
customers  or  proprietors,  no  bank  would  have  dared 
to  plead  the  statute  of  limitations  against  just  calls 
for  payment  of  these  balances.  The  entire  indebted 
ness  of  the  chartered  banks,  either  on  account  of 
unpaid  dividends  or  unclaimed  balances,  was  only 
8300,523  in  1891.1 

The  plan  of  the  Government  was  rather  roughly 
welcomed.  It  was  opposed  as  a  scheme  to  alter  the 
devolution  of  personal  property  and  an  invasion  of 
the  rights  of  provinces."2  But  Sir  John  Thompson 
defended  its  constitutionality  by  the  same  principles 
as  were  later  approved  by  the  Judicial  Committee 
of  the  Privy  Council  in  Tennant  vs.  the  Union  Bank.3 
Others  insisted  that  the  banks  were  good  enough 
trustees  of  the  money,  and  that  there  was  no  reason 
for  the  transfer  to  the  government.  Save  the 
observance  -of  foreign  precedents,  all  but  the  fiscal 
purposes  of  the  clause  could  be  gained  by  simply 
requiring  each  bank  to  report  to  the  government  by 
the  20th  January  in  each  year,  the  amount  of  un 
paid  dividends  and  unclaimed  balances  with  respect 
to  which  no  transaction  has  occurred,  or  on  which 
no  interest  has  been  paid  during  the  five  years  pre 
ceding.  This  view  was  accepted,  and  the  clause, 
while  still  requiring  complete  details,  was  amended 
to  conform  to  it.  (53  Vic.,  cap.  31,  §  88,  1-3.) 

With  the  exception  of  four  or  five  admirers  of  the 
American  banking  and  currency  legislation,4  the 

1This  excludes  $146,705,  owed  by  two  chartered  savings  banks  in 
the  province  of  Quebec,  and  it  includes  the  §75,200  owed  by  the 
Bank  of  Montreal. 

2Debates  of  the  House  of  Commons,  Canada,  p.  3816,  Remarks  of 
Mr.  Edward  Blake. 

3Cf.  Journal  of  the  Canadian  Bankers'  Association,  vol.  i,  p.  201. 

4Mr.  White,  Card  well,  hoped  that  banks  securing  circulation  by 


332  The  Canadian  Banking  System,  1817-1890 

members  of  the  House  of  Commons  did  not  object 
so  strenuously  to  the  other  banking  proposals  of  the 
Government. 

The  principal  reform,  chief  by  reason  of  its  novelty, 
efficacy  and  consequences,  was  the  formation  of  the 
Bank  Circulation  Redemption  Fund,  by  which  to 
guarantee  the  payment  of  the  notes  of  any  failed  bank 
within  sixty  days  of  its  suspension,  and  with  interest  at 
6  per  cent,  per  annum  from  the  day  of  failure  to  the 
day  of  redemption.  This  fund,  which  first  reached  its 
normal  amount  in  July,  1892,  was  contributed  by  all 
the  banks,  each  depositing  with  the  Minister  of 
Finance  before  the  15th  July,  1891,  a  sum  of  money 
equal  to  2i  per  cent,  of  the  average  amount  of  its 
notes  in  circulation  during  the  preceding  twelve 
months,  and  such  further  sum  before  the  15th  July, 
1892,  as  was  necessary  to  make  the  total  contribution 
of  each  bank  equal  to  5  per  cent,  of  the  average 
amount  of  its  notes  in  circulation  during  the  twelve 
months  preceding  the  last  date  named.  The  purpose 
of  the  fund,  in  brief,  is  wholly  to  prevent  discount 
upon  bank  notes,  whatever  the  condition  of  the  bank 
which  issued  them;  that  is,  to  make  the  security  of 
the  Canadian  currency  indisputable,  permanent,  corn- 
deposits  of  Dominion  bonds  would  be  exempted  from  the  require 
ments  of  the  Bank  Circulation  Redemption  Fund.  Ibid,  3817. 

Mr.  Casey,  West  Elgin,  moved  "that  the  government  should 
issue  or  guarantee  the  absolute  soundness  of  all  paper  currency 
issued  or  circulated  as  money,"  p.  189. 

Sir  Donald  Smith,  Montreal,  wished  a  "thoroughly  secured  cur 
rency,"  p.  3828.  This  remark  should  be  read  in  connection  with  his 
speech  as  president  to  the  shareholders  of  the  Bank  of  Montreal  in 
June,  supra,  320. 

Mr.  Hesson,  North  Perth,  believing  that  no  security  is  as  satis 
factory  to  the  people  as  that  of  the  government,  wanted  a  national 
currency,  p.  3838. 


Reforms  Adopted  ly  Parliament  333 

plete.     The  means  are  best   described  in  the  careful 
language  of  the  act  itself: 

§53.  The  payment  of  the  notes  issued  or  re-issued  by  the  bank 
and  intended  for  circulation,  and  then  in  circulation,  together  with 
any  interest  paid  or  payable  thereon  as  hereinafter  provided,  shall 
be  the  first  charge  upon  the  assets  of  the  bank  in  case  of  its  insol 
vency;  *  *  * 

§54.  (4)  "The  Bank  Circulation  Redemption  Fund,"  *  *  *  shall 
be  held  for  the  following  purpose,  and  for  no  other,  namely:  In 
the  event  of  the  suspension  by  the  bank  of  payment  in  specie  or 
Dominion  notes  of  any  of  its  liabilities  as  they  accrue,  for  the  pay 
ment  of  the  notes  then  issued  or  re-issued  by  such  bank  and  in 
tended  for  circulation,  and  then  in  circulation,  and  interest  thereon; 
and  the  Minister  of  Finance  and  Receiver-General  shall,  with 
respect  to  all  notes  paid  out  of  the  said  fund,  have  the  same  rights 
as  any  other  holder  of  the  notes  of  the  bank: 

(5)  The  fund  shall  bear  interest  at  the  rate  of  three  per  cent,  per 
annum,  and  it  shall  be  adjusted  as  soon  as  possible  after  the  thirtieth 
day  of  June  in  each  year,  in  such  a  way  as  to  make  the  amount  at 
the  credit  of  each  bank  contributing  thereto,  unless  herein  other 
wise  specially  provided,  equal  to  five  per  cent,  of  the  average  note 
circulation  of  such  bank  during  the  then  next  preceding  twelve 
months: 

(6)  The  average  note  circulation  of  a  bank  during  any  period  shall 
be  determined  from  the  average  of  the  amount  of  its  notes  in  circu 
lation,  as  shown  by  the  monthly  returns  for  such  period  made  by 
the  bank  to  the  Minister  of  Finance  and  Receiver-General,  and 
where,  in  any  return,  the  greatest  amount  of  notes  in  circulation 
at  any  time  during  the  month  is  given,  such  amount  shall,  for  the 
purposes  of  this  section,  be  taken  to  be  the  amount  of  the  notes  of 
the  bank  in  circulation  during  the  month  to  which  such  return 
relates: 

(7)  In  the  event  of  the  suspension  by  the  bank  of  payment  in 
specie  or  Dominion  notes  of  any  of  its  liabilities  as  they  accrue, 
the  notes  of  such  bank,  issued  or  re-issued  and  intended  for  circula 
tion,  and  then  in  circulation,  shall  bear  interest  at  the  rate  of  six  per 
cent,  per  annum,  from  the  clay  of  such  suspension  to  such  day  as  is 
named  by  the  directors  or  by  the  liquidator,  receiver,  assignee  or 
other  proper  official,  for  the  payment  thereof, — of  which  day  notice 
shall  be  given  by  advertisement  for  at  least  three  days  in  a  news 
paper  published  in  the  place  in  which  the  head  office  of  the  bank 
is  situate;  but  in  case  any  notes  presented  for  payment  on  or  after 
any  day  named  for  payment  thereof  are  not  paid,  all  notes  then 


334  The  Canadian  Banking  System,  1817-1890 

unpaid  and  in  circulation  shall  continue  to  bear  interest  to  such 
further  day  as  is  named  for  payment  thereof,— of  which  day  notice 
shall  be  given  in  manner  above  provided:  Provided  always,  that  in 
case  of  failure  on  the  part  of  the  directors  of  the  bank,  or  of  the 
liquidator,  receiver,  assignee  or  other  proper  official,  to  make 
arrangements  within  two  months  from  the  day  of  suspension  of 
payment  by  the  bank  as  aforesaid  for  the  payment  of  all  of  its  notes 
and  interest  thereon,  the  Minister  of  Finance  and  Receiver-General 
may  thereupon  make  arrangements  for  the  payment  of  the  notes 
remaining  unpaid,  and  all  interest  thereon,  out  of  the  said  fund, 
and  shall  give  such  notice  of  such  payment  as  he  thinks  expedient, 
and  on  the  day  named  by  him  for  such  payment  all  interest  on 
such  notes  shall  cease,  anything  herein  contained  to  the  contrary 
notwithstanding;  but  nothing  herein  contained  shall  be  construed 
to  impose  any  liability  on  the  Government  of  Canada  or  on  the 
Minister  of  Finance  and  Receiver-General  beyond  the  amount 
available  from  time  to  time  out  of  the  said  fund: 

(8)  All  payments  made  from  the  said  fund  shall  be  without  regard 
to  the  amount  contributed  thereto  by  the  bank  in  respect  of  whose 
notes  the  payments  are  made;  and  in  case  the  payments  from  the 
fund  exceed  the  amount  contributed  by  such  bank  to  the  fund  and 
all  interest  due  or  accruing  due  to  such  bank  thereon,  the  other 
banks  shall,  on  demand,  make  good  to  the  fund  the  amount  of  such 
excess,  pro  raid  to  the  amount  which  each   bank  has  at  that  time 
contributed  to  the  fund;  and  all  amounts  recovered  and  received  by 
the  Minister  of  Finance  and  Receiver-General  from  the  bank  on 
whose  account  such  payments  were  made  shall,  after  the  amount  of 
such  excess  has  been  made  good  as  aforesaid,  be  distributed  among 
the  banks  contributing  to  make  good  such  excess  pro  rata  to  the 
amount  contributed  by  each:  Provided  always,  that  each  of  such 
other  banks  shall  only  be  called  upon  to  make  good  to  the  said  fund 
its  share  of  such  excess,  in  payments  not  exceeding  in  any  one 
year  one  per  cent,  of  the  average  amount  of  its  notes  in  circulation, 
such  circulation  to  be  ascertained  in  such  manner  as  the  Minister 
of  Finance  and  Receiver-General  decides;  and  his  decision  shall 
be  final: 

(9)  In  the  event  of  the  winding  up  of  the  business  of  a  bank  by 
reason  of  insolvency  or  otherwise,  the  treasury  Board  may,  on  the 
application  of  the  directors,  or  of  the  liquidator,  receiver,  assignee 
or  other  proper  official,  and  on  being  satisfied  that  proper  arrange 
ments  have  been  made  for  the  payment  of  the  notes  of  the  bank 
and  any  interest  thereon,  pay  over  to  such  directors,  liquidator, 

.receiver,  assignee  or  other  proper  official,  the  amount  at  the  credit 
of  the  bank,  or  such  portion  thereof  as  it  thinks  expedient: 


Reforms  Adopted  ~by  Parliament  335 

(10)  The  Treasury  Board  may  make  all  such  rules  and  regulations 
as  it  thinks  expedient  with  reference  to  the  payment  of  any  moneys 
out  of  the  said  fund,  and  the  manner,  place  and  time  of  such  pay 
ments,   the  collection  of  all  amounts  due  to  the  said  fund,  all 
accounts   to  be   kept  in  connection   therewith,  and  generally  the 
management  of  the  said  fund  and  all  matters  relating  thereto: 

(11)  The  Minister  of  Finance  and  Receiver-General  may,  in  his 
official  name,  by  action  in  the  Exchequer  Court  of  Canada,  enforce 
payment  (with  costs  of  action)  of  any  sum  due  and  payable  by  any 
bank  under  the  provisions  of  this  section.     (53  Vic.,  cap.  31.) 

As  complements  to  the  safety  fund  thus  established, 
action  was  taken  in  response  to  the  second  and  third 
general  demands  for  reform. 

III.  It  was  required  that  each  bank  shall  make  ar 
rangements  to  ensure  the  circulation  of  its  notes  at 
par,  in  all  parts  of  Canada,  and  towards  the  purpose 
it  shall  establish  agencies  for  the  redemption  and 
payment  of  notes  at  the  commercial  center  of  each 
province,  viz.,  Halifax,  St.  John,  Charlottetown, 
Montreal,  Toronto,  Winnipeg  and  Victoria.  (53  Vic., 
cap.  31,  §55.)  Under  the  Suffolk  system,  a  redemp 
tion  office  in  Boston  was  found  sufficient  to  prevent 
the  discount  on  "foreign  bank  notes  "  from  any  part 
of  New  England,1  and  the  redemption  agencies  of  the 
Dominion  government  at  the  provincial  capitals  had 
kept  the  notes  of  the  Dominion  at  par.  There  was 
no  reason  why  a  similar  arrangement  should  not  have 
like  effect  on  the  notes  of  the  chartered  banks.  The 
requirement  of  redemption  also  removed  an  element 
of  danger  which  the  establishment  of  a  fund  might 
otherwise  have  introduced.  Having  received  in 
creased  credit  from  it,  the  notes  were  likely  to  remain 
in  circulation  longer,  and  it  was  necessary  to  counter 
act  the  qualified  tendency  toward  inflation  by  im 
proving  the  facilities  for  redemption. 

aD.  R.  Whitney,  "  The  Suffolk  Bank,"  Cambridge,  1878,  pp.  46,  60. 


336  The  Canadian  Banking  System,  1817-1890 

IV.  Banks  going  into  liquidation  under  a  general 
winding-up  act,  or  becoming  insolvent,  were  not 
only  deprived  of  the  benefits  originally  enjoyed 
under  the  statute  of  limitations,  but  were  obliged  to 
yield  to  the  government  whatever  advantages  may 
still  be  had  by  solvent  banks  from  the  loss  or  destruc 
tion  of  notes.1  Moneys  which  are  payable  by  the 
liquidator  to  shareholders  and  depositors,  and  which 
have  remained  unclaimed  for  three  years  after  the 
suspension  or  beginning  of  the  winding-up,  or  until 
the  winding-up  is  complete,  if  that  occurs  before  the 
expiry  of  three  years  from  the  time  it  is  begun,  are 
required  to  be  paid  to  the  Minister  of  Finance.  He 
holds  them  subject  to  the  claims  on  behalf  of  any  per 
son  other  than  the  bank.  Such  claims  being  estab 
lished  to  the  satisfaction  of  the  Treasury  Board,  the 
moneys  are  repaid  to  the  person  entitled  to  them. 
If  interest  was  payable  by  the  bank,  the  Minister  of 

JThe  profit  from  notes  lost  or  destroyed,  has  no  such  importance 
as  the  public  commonly  impute  to  it.  The  practice  of  hoarding 
savings  in  bank  notes  is  practically  obsolete  in  Canada.  A  person 
may  as  well  trust  a  bank  in  another  way  and  get  interest  on  his 
credit,  i.  e.,  by  making  a  deposit.  So  the  possibility  that  notes  thus 
held  may  be  destroyed  by  fire  or  what  not,  has  no  bearing  on  the 
question.  The  loss  by  accident,  theft,  robbery,  etc.,  also  has  no 
effect  on  the  bank.  Its  debt  simply  falls  into  other  hands;  the  evi- 
,  dence  of  it  still  exists.  The  only  possibility  of  profit  lies  in  the 
complete  destruction  of  notes,  or  such  loss  as  makes  recovery  by 
whomsoever,  utterly  impossible.  There  are,  it  is  true,  quantities 
of  notes  which  for  some  time  disappear  from  active  circulation,  for 
so  long,  in  fact,  that  an  inexperienced  observer  would  think  they 
must  have  been  lost.  It  was  this  tardiness  in  coming  back  for  re 
demption  of  which  winding-up  acts  enabled  banks  in  liquidation  to 
take  advantage,  and  it  was  the  extinction  of  the  holder's  claim  on 
such  paper  that  prompted  the  second  general  demand  for  reform 
above  noted.  In  former  years  the  board  of  many  a  bank  still  in 
existence,  have  decided,  after  profound  and  solemn  deliberation, 
to  write  off  a  certain  amount  from  the  issue  account  for  destroved 


Reforms  Adopted  by  Parliament  337 

Finance  also  pays  interest  at  three  per  cent,  for  not 
more  than  six  years  from  the  date  he  received  the 
unclaimed  balances.  (§  88,  [4].) 

By  a  similar  provision,  it  was  enacted  that  the 
liquidator  shall,  before  the  final  distribution  of  assets, 
or  within  three  years  of  the  date  of  suspension  or 
winding-up  act,  pay  to  the  Minister  of  Finance  a 
sum  equal  to  the  amount  of  the  notes  of  the  bank 
intended  for  circulation,  and  then  outstanding.  The 
bank  and  its  assets  are  then  relieved  from  further 
liability  upon  its  notes,  as  the  Minister  of  Finance  is 
required  to  apply  the  sums  so  received  to  the  re 
demption  of  the  bank's  notes  as  they  are  presented, 
without  interest.  (§88,  [5].)  The  first  provision  was 
explained  as  solatium  for  the  Minister's  previous 
concessions  in  the  matter  of  unclaimed  balances.  By 
this,  together  with  the  exception  of  a  solvent  bank's 
debts  from  the  statute  of  limitations,  and  the  require 
ment  that  the  amounts  and  owners  of  unclaimed 

notes  which  they  never  expected  to  see  again,  and  to  add  the  same 
to  the  credit  of  profit  and  loss.  Subsequently,  they  have  been 
obliged,  somewhat  more  solemnly,  we  may  safely  say,  to  write  the 
amount  back  again.  The  notes  supposed  to  be  lost  persistently 
returned  for  redemption.  Banks  which  have  taken  over  the  busi 
ness  of  othec  banks,  have  been  called  on  to  redeem  more  notes  of 
the  amalgamated  banks  than  were  outstanding  when  the  union 
occurred.  Figures  furnished  me  by  bankers,  show  that  of  the  one 
and  two  dollar  notes  in  circulation  on  the  3d  June,  1871,  less  than 
one  per  cent,  are  still  outstanding.  Of  the  four  dollar  notes  in  cir 
culation  on  the  30th  June,  1881,  which  the  banks  were  instructed 
thereafter  to  call  in,  less  than  two  per  cent,  are  outstanding,  the 
proportion  unredeemed  being  as  low  as  1.3  per  cent,  in  some  cases, 
and  in  others  less  than  .2  per  cent.  For  some  banks,  we  may  say 
that  the  interest  on  the  amount  of  destroyed  notes  might,  possibly, 
pay  the  mere  cost  of  printing  involved  in  the  maintenance  of  a  cir 
culation.  The  experience  of  many  others  would  not  warrant  the 
statement  that  there  is  any  appreciable  gain  through  the  destruc 
tion  of  notes  not  presented  for  redemption. 
22 


338  The  Canadian  Banking  System,  1817-1890 

balances  shall  be  published,,  the  purposes  of  his 
original  proposal  were  pretty  well  attained.  The 
justice  of  the  second  requirement  is  manifest.  With 
out  it,  the  stray  notes  that  were  slow  to  come  in 
would  be  a  charge  upon  the  funds  contributed  by 
the  other  banks.  The  bank  whence  they  issued  was 
obliged  to  take  care  of  its  outcast  children — found 
lings  the  other  banks  refused  to  rear. 

Four  effects  of  the  Bank  Circulation  Eedemption 
Fund  and  the  complementary  requirements  deserve 
immediate  mention.  First,  the  united  credit  of  all 
the  banks  of  the  system  was  placed  back  of  the 
currency  issued  by  any  one  of  them.  Second,  the 
interest  of  six  per  cent,  on  the  notes  of  a  failed 
bank  provided  an  incentive  for  a  liquidator  promptly 
to  redeem  them;  it  was  an  inducement  to  solvent 
banks  to  receive  them  from  their  customers,  and  it 
was  a  protection  to  all  holders  from  loss.  Third,  it 
made  it  impossible  that  the  notes  of  a  failed  bank 
should  fall  below  par,  for  besides  the  liability  of  the 
shareholders  and  of  the  assets  of  the  issuing  bank, 
there  was  pledged  to  their  redemption  within  sixty 
days,  at  101,  an  accumulated  and  available  fund  of 
over  $1,800,000.  Fourth,  the  bank  note,  currency 
of  Canada  acquired  a  thoroughly  national  char 
acter;  since  1890  it  has  circulated  from  one  end  of 
the  country  to  the  other,  never  causing  loss  to  the 
holder,  yet  keeping-  unimpaired  the  qualities  for 
which,  in  its  less  perfect  state,  Canadians  had  again 
and  again  refused  to  give  it  up. 

The  origin  of  the  measure  is  more  difficult.  The 
plan  had  been  quietly  worked  out  by  an  Ottawa 
banker  in  the  summer  of  1888;  it  had  occurred  about 
the  same  time  to  a  banker  in  Toronto  as  an  excellent 


Reforms  Adopted  ~by  Parliament  339 

modification  of  the  New  York  Safety  Fund,  the  de 
vice  of  which  Millard  Fillmore  said:  "It  is  therefore 
apparent  that  the  Safety  Fund  would  have  proved 
an  ample  security  to  the  bill  holder,  had  it  not  been 
applied  to  the  payment  of  other  debts  of  insolvent 
banks  than  those  due  for  circulation."1  On  the  other 
hand,  the  Minister  of  Finance  has  kindly  assured  me 
that  it  was  no  adaptation,  but  quite  an  independent 
Canadian  development,  designed  to  meet  Canadian 
needs.  And  I  am  informed  that  after  the  bankers 
laid  before  him  their  plan  for  a  "  Security  Fund,"  as 
it  was  first  termed,  Mr.  Foster  told  them  that  the 
scheme  was  about  what  he  had  thought  of. 

Upon  such  high  and  diverse  evidence,  one  cannot 
be  expected  to  determine  the  original  invention  of 
this  excellent  feature  of  the  present  Bank  Act.  A  safe 
theory,  doubtless,  is  that  of  a  contemporaneous  inven 
tion  by  several  persons  more  or  less  influenced, 
though  not  always  consciously,  by  the  reminiscences 
of  the  New  York  Safety  Fund  system  still  frequent 
in  discussions  of  banking,  and  by  the  knowledge  of 
the  fund  for  the  redemption  of  national  bank  notes 
kept  in  the  United  States  Treasury  under  somewhat 
analogous  regulations.2  Mr.  Foster  did  not  adopt  the 

'  l Report  of  the  Comptroller  of  the  State  of  New  York,  1849,  p.  29. 
-'To  trace  the  origin  of  the  plan  in  the  State  of  New  York,  it 
will  be  necessary  to  revert  to  the  legislation  of  1829  by  which  the 
"Safety  Fund"  was  first  established.  The  first  proposal  of  the 
scheme  must  be  ascribed,  not  to  the  governor  at  that  time,  Martin 
Van  Buren,  but  to  one  Joshua  Forman,  whose  suggestions  the  gov 
ernor  merely  recommended  to  the  assembly.  The  real  author  de 
scribes  the  origin  of  the  plan  thus:  "The  propriety  of  making  the 
banks  liable  for  each  other  was  suggested  by  the  regulation  of  the 
Hong  merchants  in  Canton,  where  a  number  of  men,  each  acting 
separately,  have  by  the  grant  of  the  government  the  exclusive  right 
of  trading  with  foreigners,  and  are  all  made  liable  for  the  debts  of 


340  The  Canadian  Banking  System,  1817-1890 

plan  exactly  as  the  bankers  suggested  it.  There  was 
no  maximum  established  in  his  bill  for  the  amount 
which  a  bank  might  be  obliged  to  contribute  to  the 
fund  within  the  course  of  a  year.  The  representa 
tives  of  the  Bank  of  Montreal  very  properly  objected 
to  the  proposal  in  this  form,  for  under  certain  circum 
stances,  as  they  conceived,  their  bank  might  be  in 
volved  in  a  liability  limited  only  by  the  circulation  of 
the  other  banks  in  the  Dominion  and  its  own  ability 
to  pay.1  The  Government  consented  to  remove  the 
dangerous  feature,  and  in  Committee  of  the  Whole 
the  amount  payable  by  a  bank  within  a  year  was 
fixed  at  one  per  cent. .of  its  circulation.  This  provi 
sion  for  maintenance  was  believed  to  be  quite  ample. 
The  experience  of  twenty-three  years  showed  the  im 
probability  of  one  of  the  overwhelming  banking 
catastrophes,  without  which  a  long  impairment  of 
the  fund  would  be  impossible. 

Y.  The  fourth  criticism  remarked  in  §50  was  met 
by  requiring  from  each  new  bank  subscriptions  to 
$500,000  of  its  stock  and  payment  of  $250,000.  No 
new  bank  is  permitted  to  begin  its  business  or  issue 
notes  until  $250,000  of  the  capital  shall  have  been 
deposited  in  specie  with  the  Minister  of  Finance  for 
a  period  of  at  least  four  weeks,  or  until  a  certificate 

each  in  case  of  failure.  The  case  of  our  banks  is  very  similar;  they 
enjoy  in  common  the  exclusive  right  of  making  a  paper  currency 
for  the  people  of  the  state,  and  by  the  same  rule,  should  be  in  com 
mon  answerable  for  that  paper.  This  abstractly  just  principle  which 
has  stood  the  test  of  experience  for  over  seventy  years,  and  under 
which  the  bond  of  a  Hong  merchant  has  acquired  a  credit  over  the 
whole  world  not  exceeded  by  that  of  any  security,  modified  and 
adapted  to  the  milder  features  of  our  republican  institutions,  con 
stitutes  the  basis  of  this  system."  Vide  Van  Buren,  "Message,  made 
to  the  Assembly,  January  26th,  1829,"  Albany,  1829. 
1  Garland,  op  cit.,  p.  308. 


Reforms  Adopted  by  Parliament  341 

permitting  it  to  do  so  shall  have  been  issued  by  the 
Treasury  Board.  The  certificate  may  not  be  granted 
until  they  are  satisfied  that  the  requirements  as  to 
capital  payment,  election  of  directors,  etc.,  have  been 
complied  with,  nor  after  twelve  months  from  the  day 
on  which  the  act  of  incorporation  came  into  effect. 
(53  Vic.,  cap.  31,  §§10,  13-16.) 

VI.  The  payment  of  any  amount  due  to  the  gov 
ernment  of  Canada,  in  trust  or  otherwise,  was  made 
the  second  charge  on  the  assets  of  an  insolvent  bank, 
and  any  amount  due  to  the  government  of  any  of  the 
provinces  a  third  charge,  the  note  holder  being  still 
assured  the  first  right  of  preference.  (The  Bank  Act, 
§53.)  This  was  merely  the  embodiment  in  the  Bank 
Act  of  the  Crown  priority  at  English  common  law. 
The  Minister  of  Justice,  Sir  John  Thompson,  explained 
the  action  thus:  "We  seek  to  put  it  on  the  face  of  the 
Bill,  first,  because  we  are  endeavoring  to  adopt  an 
Act  with  respect  to  banks  and  banking,  which  will 
embody  as  much  of  the  common  law,  as  well  as  of 
the  statute  law,  as  we  can  conveniently  embody  in  a 
Bill  of  this  kind;  second,  in  order  that  the  public 
shall  know  what  the  law  is  with  respect  to  the  rights 
of  the  Government,  what  the  rule  is  that  prevails 
with  respect  to  the  prerogative  of  the  Crown  in  rela 
tion  to  its  debts."1  The  law  was  not  the  same  in 
the  different  provinces,  and  although  the  attempt  to 
enforce  it  in  order  to  the  recovery  of  deposits  with  the 
Maritime  Bank  was  successful,  the  Quebec  courts  had 
declined  to  sustain  the  prerogative  in  a  suit  at  the 
civil  law  of  that  province.  Some  objected  that  the 
priority  would  diminish  the  security  afforded  to  the 
depositor.  The  Minister,  in  justifying  the  preroga- 
1  Debates,  1890,  p.  3966. 


342  The  Canadian  Banking  System,  1817-1890 

tive,  inquired,  "  Is  it  not  vain  to  talk  about  the  neces 
sity  of  private  individuals  trusting  the  banks  of  the 
country?     They  trust  them  for  their  own  accommo 
dation,  for  their  own   business   and   profit."      "We 
are  collecting  revenue  in  Canada  under  the  authority 
of  this   Parliament,   over  a  wide   extent  of  country, 
by  a  large  army  of  officers  of  the  Customs  and  Inland 
Revenue,  from  penalty  collecting  officers,  from  magis 
trates  who   collect  penalties  due  to  us,  from  agents 
collecting  moneys  to  be  applied  to  the  Crown,  and  the 
only  hands  we  have  for  the  receipt  of  this  revenue 
or  of    any  moneys  payable  to  the   Crown,   are  the 
banks  wherever  they  are  established.     It  is  impossi 
ble   that    officers     *     *     *     *     can    have   vaults   of 
their  own  in  which  to  store  money.     We  must  resort 
to  the  banks,  not  only  for  the  convenience  of  making 
deposits,   but  for  transmission,  and  to  that   extent, 
necessarily,  the  Government  is  an  involuntary  credi 
tor  of  all  those  institutions — those  banks  which  are 
the  creatures  of  this  Parliament  and  of  this  Govern 
ment.     *     *     *     Perforce  we    are    obliged  to   avail 
ourselves   of   these  monetary  institutions;    and  the 
same  privilege  should  be  given  to  the  Crown  in  regard 
to  its  moneys  as  is  given  to  the   Crown  in  regard 
to  the  discharge  of  the  duties  of  its  officers,  for  the 
very  analogous  reason  that  the  Crown,  being  obliged 
to  discharge  its  functions  of  government  by  a  great 
army  of  officers  throughout  the  country,  is  relieved 
of  responsibility  for  the  negligence  of  its  officers." 
Others  denied  the  application  of  the  remarks  to  the 
provinces,  which  had  no  such  difficult  task  in  collect 
ing  their  revenue.     Mr.  Weldon   acutely  noted  the 
distinction  between  the  Crown  priority  for  moneys 
Debates,  1890,  pp.  3966,  3967,  3975. 


Reforms  Adopted  by  Parliament  343 

collected  as  public  revenue,  and  for  money  which  the 
government  chooses  to  loan  to  a  bank  in  order  to 
obtain  interest.  Sir  John  Thompson  refused  to  accept 
the  distinction,  in  replying:  "The  Government  stands 
in  precisely  the  same  relation  with  regard  to  large 
classes  and  sums  of  money  (not  revenue),  as  it  does 
in  relation  to  revenue,  such  as  security  from  con 
tractors,  and  deposits  from  insurance  companies." 
The  result  of  such  a  distinction  would  be  that  the 
government  could  not  distribute  the  funds  in  its 
keeping  and  spread  the  risk,  while  at  the  same  time 
preserving  a  lien.  Sir  John  Macdonald  remarked 
that  "the  banks,  no  doubt,  would  infinitely  rather 
run  the  liability  than  lose  the  Government  deposits. 
A  bank  is  at  liberty  to  post  a  notice  saying  it  will 
not  receive  Government  deposits  on  the  second  lien 
footing.  But  the  shareholders  would  say,  at  the  next 
meeting,  that  the  directors  had  thus  injured  the 
bank's  standing  and  prestige."  It  is  apparent  that 
the  criticism  of  Mr.  Weldon  was  evaded  rather  than 
refuted.  His  remark  applied  to  the  case  of  govern 
ment  assistance  to  a  bank,  whether  for  the  public 
good  or  the  advantage  of  the  government's  friends. 
In  a  debate  upon  bank  inspection,  occurring  in 
1885,  Sir  John  Macdonald  had  stated  the  Govern 
ment's  policy  thus:  "It  is  sometimes  in  the  interests 
of  the  Government  (and  the  Government  should  have 
no  interest  except  that  of  the  public)  to  strengthen 
banks  by  making  deposits.  It  has  been,  in  my  expe 
rience,  looking  back,  found  requisite  or  expedient  by 
several  Governments,  in  times  of  great  depression,  to 
prevent  universal  ruin,  universal  panic,  to  come  to 
the  help  of  some  of  the  bank  institutions.  Govern 
ments  have  on  occasion  prevented  universal  panic  by 


344  The  Canadian  Banking  System,  1817-1890 

acting  in  concert  with  strong  banking  institutions, 
in  helping  to  sustain  banks  which  were  not  quite  so 
strong."1  The  certain  establishment  of  the  right  of 
the  Crown  to  preference,  tends,  it  would  seem,  to 
induce  a  Government  to  assist  a  weak  bank,  particu 
larly  when  they  are  unduly  pressed,  and  there  are 
good  chances  of  bringing  it  safely  out  by  that  means. 
But  since  one  or  two  painful  experiences  the  Gov 
ernments  of  Canada  and  of  the  provinces  have  been 
chary  of  being  caught  in  a  failed  bank.  In  stormy 
times  the  funds  of  the  state  appear  to  desert  the 
frailer  craft,  to  seek  safety  in  the  staunchest  and 
strongest  of  the  banks.  The  attitude  of  the  people 
was  clearly  indicated  after  the  Exchange  Bank  fail 
ure.  Politicians  will  not  willingly  provoke  a  like 
explosion  of  criticism.  Public  opinion  is  a  mighty 
corrective  for  any  such  abuses  as  granting  loans  or 
unduly  heavy  deposits  to  a  favored  bank,  but  in  the 
later  years  of  Canadian  banking  its  effect  has  been 
potential.  The  need  for  its  active  exertion  has  not 
arisen. 

VII.  By  a  seventh  series  of  new  clauses  the  loan 
ing  powers  of  the  bank  were  extended,  the  law  as 
to  warehouse  receipts,  etc.,  recast,  and  the  proceed 
ings  under  it  simplified.  The  principles  already  re 
cognized  that  a  bank  may  advance  money  in  certain 
cases  to  aid  in  the  manufacture  of  goods,  and  may 
keep  its  claim  on  the  material  security  during  and 
after  transformation  from  the  raw  material  to  the 
finished  product,  were  made  general  in  the  follow 
ing  clauses: 

§74.  The  bank  may  lend  money  to  any  person  engaged  in  busi 
ness  as  a  wholesale  manufacturer  of  any  goods,  wares  and  merchan- 

1  Debates,  House  of  Commons,  1885,  p.  85. 


Reforms  Adopted  by  Parliament  345 

dise,  upon  the  security  of  the  goods  wares  and  merchandise  manu 
factured  by  him  or  procured  for  such  manufacture: 

2.  The  bank  may  also  lend  money  to  any  wholesale  purchaser 
or  shipper  of  products  of  agriculture,  the  forest  and  mine,  or  the 
sea,  lakes  and  rivers,  or  to  any  wholesale  purchaser  or  shipper  of 
live  stock  or  dead  stock,  and  the  products  thereof,  upon  the  security 
of  such  products  or  of  such  live  stock  or  dead  stock  and  the  product 
thereof: 

3.  Such  security  may  be  given  by  the  owner  and  may  be  taken 
in  the  form  set  forth  in  Schedule  C  to  this  act,  or  to  the  like  effect; 
and  by  virtue  of  such  security,  the  bank  shall  acquire  the  same 
rights  and  powers  in  respect  to  the  goods,  wares  and  merchandise, 
stock  or  products  covered  thereby,  as  if  it  had  acquired  the  same  by 
virtue  of  a  warehouse  receipt. l 

§76.  If  goods,  wares  and  merchandise  are  manufactured  or  pro 
duced  from  the  goods,  wares  and  merchandise,  or  any  of  them, 
included  in  or  covered  by  any  warehouse  receipt  or  security  given 
under  section  seventy-four  of  this  Act,  while  so  covered,  the  bank 
holding  such  warehouse  receipt  or  security  shall  hold  or  continue 
to  hold  such  goods,  wares  and  merchandise,  during  the  process  and 
after  the  completion  of  such  manufacture  or  production,  with  the 
same  right  and  title  and  for  the  same  purposes  and  upon  the  same 
conditions  as  it  held  or  could  have  held  the  original  goods,  wares 
and  merchandise. 

The  word  "manufacturer''  was  extended  to  include 
"maltsters,  distillers,  brewers,  refiners  and  producers 
of  petroleum,  tanners,  curers,  packers,  canners  of 
meat,  pork,  fish,  fruit,  or  vegetables,  and  any  person 

1  Following  is  the  form  given  in  Schedule  C.: 

In  consideration  of  an  advance  of  dollars,  made  by  the  (name  of 

bank)  to  A.  B.,  for  which  the  said  bank  holds  the  following  bills  or  notes  (de 
scribe  fully  the  bills  or  notes  held,  if  any),  the  goods,  wares  and  merchandise  men 
tioned  below  are  hereby  assigned  to  the  said  bank  as  security  for  the  pay 
ment,  on  or  before  the  day  of  of  the  said  advance, 
together  with  interest  thereon  at  the  rate  of  per  cent,  per  annum 
from  the  day  of  (or  of  the  said  bills  and  notes  or 
renewals  thereof,  or  substitutions  therefor,  and  interest  thereon,  or  as  the  case 
may  be.) 

This  security  is  given  under  the  provisions  of  section  seventy-four  of  ''The 
Bank  Act,1'  and  is  subject  to  all  the  provisions  of  the  said  Act. 

The  said  goods,  wares  and  merchandise  are  now  owned  by 
and  are  now  in  possession,  and  are  free  from   any  mortgage,  lien  or 

charge  thereon  (or  as  the  case  may  be)  and  are  in  (place  or  places  where  goods 
are),  and  are  the  following:  (particular  description  of  goods  assigned). 

Dated  at  18    . 


346  The  Canadian  Banking  System,  1817-1890 

who  produces  by  hand,  art,   process  or  mechanical 
means    any   goods,   wares  or   merchandise."     (§  2. 

The  new  clause  made  it  possible  to  dispense  with 
the  legal  fiction  by  which  the   bank  was  allowed  to 
lend  directly   on  the  security  of  goods  by  taking  a 
warehouse  receipt  or  bill  of  lading  therefor  from  any 
person  engaged  in  the  ostensible  business  of  keeper 
of  a  yard,  cove,  wharf  or  harbor,  or  of  warehouse 
man,    miller,    sawmiller,  maltster,  manufacturer   of 
timber,   wharfinger,  master  of  a  vessel^  or  other  car 
rier  by  land  or  by  water,  or  by  both,  curer  or  packer 
of  meat,  tanner,  dealer  in  wool,  or  purchaser  of  agri 
cultural  produce,   even  though   the  grantor    of    the 
document  was  the   owner  of  the  goods.     Provision 
for  making  such  advances  directly  was  now  supplied 
by  §  74,  without  the  rather  clumsy  device  of  dividing 
the   borrower  into  two  persons  in   order  to  his  con 
cluding    a   transaction    with    himself.      Henceforth, 
persons  owning  the  goods    could  not   grant  a  ware 
house  receipt  or  bill  of  lading  for  them.     The  acqui 
sition  and  holding  of  the    warehouse   receipt  or  bill 
of  lading,   or  the   security   above  described,  are  for 
bidden  the  bank,  unless  the  debt  which  these  secured 
is  negotiated  at  the  same  time  as  they  were  taken,  or 
upon  the  written  promise  that  such  security  will  be 
given  the  bank.     Renewals  of  loans  thus  made  can 
be  granted  without  affecting  the  security.     The  bank 
may  surrender    a    warehouse    receipt   for    a  bill   of 
lading,  and  vice  versa;  it   retains  the  prior  lien  over 
the  unpaid  vendor;  it  may  sell  the  goods  on  non-pay 
ment  of  the  debt  without  the  consent  of  the  pledger, 
but  must  dispose  of  them  at  public  auction,  after  due 
advertisement,  and  in  the  case  of  timber  or  lumber, 


Reforms  Adopted  by  Parliament  347 

must  give  thirty  days'  notice  of  the  sale,  by  regis 
tered  letter  to  the  pledgor,  and  in  case  of  other  goods, 
etc.,  ten  days'  notice.  The  penalties  for  misde 
meanor  and  not  more  than  two  years'  imprisonment, 
are  established  for  giving  false  receipts,  etc. ;  for 
alienation  of  the  goods  described  in  the  instrument, 
by  the  bailee,  before  the  debt  is  paid  and  without  the 
consent  of  the  bank  given  in  wrriting;  or  for  with 
holding  from  the  bank  possession  of  the  goods  after 
default  has  occurred  in  payment. 

We  have  here  the  last  stage  of  a  development  out 
lined  in  Parliament,  thus: 

(a)  only  the  bailee  gives  a  warehouse  receipt; 

(b)  warehouseman    gives    a    receipt    for   his    own 
goods; 

(c)  abatement  of  the  requirement  that  the  grantor 
of  the  receipt  should  be  a  warehouseman.1     The  new 
principle  was  defended  by  Sir  John  Thompson  as  a 
measure  for  the  convenience  of  manufacturers  and 
producers,    and  the  security  of  the  banks.     It  was 
calculated  to  enable  those  carrying  large  stocks  in 
course   of   manufacture  to   get    the    support    of    the 
banks  on  the  same  terms  as  are  made  to  other  appli 
cants  for  unexceptionable  advances. 

As  first  brought  down,  the  bill  authorized  the  bank 
to  loan  on  the  security  given  by  any  person  engaged 
in  business  as  a  wholesale  manufacturer  or  producer 
of  goods,  wares  and  merchandise.  The  expression 
"producer"  was  criticised  as  including  the  farmers, 
whose  general  credit  with  merchants  and  others  rests 
largely  on  the  visible  possession  of  certain  personal 
property — such  chattels  as  grain,  cattle,  and  imple- 

1  Debates,  1890,  p.  4279  et  seq.,  Remarks  of  Mr.  Blake. 


348  The  Canadian  Banking  System,  1817-1890 

ments.  An  assignment  of  these  according  to  the 
form  prescribed  by  the  act,  would  not,  like  a  chattel 
mortgage,  become  notorious,  and  the  basis  of  the 
farmer's  credit  would  be  badly  impaired,  no  creditor 
being  able  to  know  whether  the  ownership  of  prop 
erty  is  in  the  person  whom  he  is  asked  to  trust,  or 
in  some  bank.  Many  farmers,  moreover,  wish  not  to 
borrow  on  the  personal  security,  but  to  retain  and 
use  it  as  a  basis  for  credit  in  ordinary  transactions. 
The  security  afforded  to  the  bank  would  be  partly 
fictitious,  for  between  a  bank  and  a  farmer  there 
are  almost  no  such  opportunities  to  watch  the  pro 
ceedings  of  a  debtor,  to  enjoy  his  confidence,  and  to 
meet  him  in  daily  transactions,  as  there  are  between  a 
bank  and  a  manufacturer,  miller  or  produce  shipper. 
As  the  Government  had  no  intention  of  including 
farmers,  the  objectionable  phrase  was  expunged.1 

The  debate  aroused  some  of  the  champions  of  the 
farming  interests  against  private  money-lenders,  and 
the  expense  of  borrowing  on  mortgage,  but  they  were 
well  answered  by  Mr.  Blake: 

You  have  had  the  proposition  for  a  land  bank,  the  proposition 
for  a  farmers'  bank,  the  proposition  for  a  national  currency  based 
upon  land  or  irredeemable  currency,  you  have  had  numerous  pro 
posals  to  help  the  farming  community  to  cheap  and  easy  money, 
but  the  conditions  upon  which  cheap  and  easy  money  are  to  be  ob 
tained  are  absolutely  opposed  to  the  principles  which,  in  regard  to 
the  production  and  manufacture  of  goods,  are  found  to  be  sustained 
by  this  House  and  by  this  country,  at  the  present  day.  *  *  *  * 
The  moment  the  farmer  can  show  that  he  can  give  the  same  pros 
pect  of  a  return,  with  the  same  advantage,  with  the  same  security 
that  other  competitors  for  the  stock  of  available  money  can  give,  he 
will  get  all  the  money  he  wants;  and  to  the  extent  he  cannot  show 
that,  he  never  will  get  it.2 

debates,  1890,  pp.  4279,  4308.    Sir  J.  Thompson,  Sir  D.  A.  Smith,  Sir  R.  J.  Cart- 
wright,  and  Messrs.  Blake,  Kirkpatrick,  Sproule,  Landerkin,  Daly,  Watson, 
Waldie  and  Mitchell. 
.  4295. 


Reforms  Adopted  ~by  Parliament  349 

VIII.  In  the  work  of  revising  and  consolidating 
the  Bank  Act,  and  in  putting  into  statute  form  as 
much  as  possible  of  the  common  law  on  the  question, 
a  number  of  slighter  changes  were  made.  Among 
the  new  features  of  the  act,  one  finds  that  each 
director  of  the  bank  shall  hold  paid-up  stock  to  the 
amount  of— 

$3,000  when  the  paid-up  capital  of  bank  is  less  than  $1,000,000 
4,°°°  "  "  "  between    1,000,000  and 

3,000,000 
•5,000  "          over  3,000,000 

In  deference  to  the  convenience  of  banks  near  the 
northeastern  frontier  of  the  United  States,  only  a 
majority  of  the  directors  of  a  bank  were  required 
to  be  British  subjects.  Its  shareholders  were  per 
mitted  to  increase  or  decrease  the  stock  of  the  bank 
by  by-law  passed  in  general  meeting,  provided  that 
no  such  by-law  should  come  into  effect  until  approved 
by  the  Treasury  Board.  The  amount  at  which  the 
rest  must  stand  before  division  of  profits  exceeding 
eight  per  cent,  per  annum  is  allowable,  was  raised- 
from  20  to  30  per  cent,  of  the  paid-in  capital  stock. 
The  privileged  lien  enjoyed  by  the  bank  on  shares 
of  its  stock  held  by  debtors  was  retained;  in  case 
of  default,  the  bank  was  commanded  to  sell  the 
shares,  after  notice,  within  twelve  months  after 
the  debt  is  accrued  and  become  payable.  The  entire 
exemption  from  all  penalties  upon  usury  was  retained, 
and  the  banks  allowed  to  take  in  advance  any  rate  of 
interest  up  to  seven  per  cent.  A  higher  rate  is  not 
forbidden,  though  it  is  not  recoverable.  The  liability 
of  .banks  to  repay  moneys  deposited  with  them,  and 
to  pay  dividends  declared  and  payable  on  its  capital 
stock,  was  declared  to  continue,  notwithstanding  the 


350  The  Canadian  Banking  System,  1817-1890 

statute  of  limitations.    The  liability  of  the  transferor 
was  made  to  continue,  saving   his  recourse   against 
the  transferee,  on  all  shares  in  the  bank,  the  transfer 
of  which  is  registered  within  sixty  days  of  the  bank's 
suspension.     The    former    period    was    thirty    days. 
Besides  the  monthly  return,  banks  are  obliged  to  make 
special  returns  whenever  called  on  so  to  do,  and  to 
furnish  an  annual  list,  duly  certified,  of  their  share 
holders,  places  of  their  residence  and  amount  of  stock 
held  by  each.     The  making  of  false  returns  or  wilful 
concurrence  therein  is  an  offence  against  the  Bank 
Act.    The  use  of  the  titles  "Bank,"  "Banking  House," 
etc.,    without    authority   under  the   Bank   Act,   was 
made  an  offence  against  it,  whether  or  no  the  expres 
sion  "Not  Incorporated"  is  added.     Persons  commit 
ting  an  offence  against  the  Bank  Act  are  liable  to  a 
fine    not     exceeding    $1,000,    or    imprisonment    not 
exceeding  five  years,  or  both.     Finally,  the  penalties 
against  circulation  in  excess  of  paid-up  capital  were 
increased  in  severity.     To  the  absolute  consideration 
of  making  them  more  effective  was  added  the  neces 
sity  of  protecting  the  contributors  to  the  fund  guar 
anteeing  the  bank  note  currency.     For  issue  exceed 
ing  the  amount  of  the  paid-up  capital  by  not  more 
than  $1,000,  the  fine  imposed  is  equal  to  the  amount 
of  the  excess.     Where  issues  exceed  the  amount  of 
paid-up  capital  by 

$     1,000    to  $  20,000  the  fine  is  $    1,000; 

for  excess  between    20,000  and  100,000            "           10,000; 

100,000     "  200,000                        50,000; 

over       200,000  "          100,000. 

The  reforms  adopted  by  the  Canadian  Parliament 
in  the  session  of  1890,  and  embodied  in  the  "Act  res 
pecting  Banks  and  Banking"  (53  Vic.,  cap.  31),  are 


Summary  and  Review  351 

the  last  Canadian  legislation  with  which  our  histori 
cal  study  is  concerned.  This  forms  the  present  bank 
ing  law  of  the  Dominion,  common  and  uniform  for 
every  province  from  Prince  Edward  Island  to  British 
Columbia.  The  corporate  lives  of  the  thirty- six  banks 
working  under  Canadian  charters,  were  continued  by 
the  act  of  1890  to  the  1st  July,  1901;  means  were 
provided  for  bringing  the  Merchants'  Bank  of  Prince 
Edward  Island  under  its  operation,  the  special  fea 
tures  of  La  Banque  du  Peuple  were  again  confirmed, 
and  the  two  banks  working  under  royal  charter,  the 
Bank  of  British  North  America  and  the  Bank  of 
British  Columbia,  were  given  the  same  privileges, 
and  subjected,  with  but  few  exceptions,  to  the  same 
restrictions  and  duties  as  their  competitors  of  cisat 
lantic  origin.  From  the  last  and  in  some  respects 
the  most  significant  of  a  long  series  of  statutes  deal 
ing  with  banking,  we  may  properly  turn  to  a  brief 
review  of  the  leading  facts  to  'tracing  which  these 
pages  have  been  devoted. 


§53. SUMMARY    AND     REVIEW 

I.  Three  facts  have  usually  appeared  as  precedent 
to  the  incorporations  granted  by  the  legislatures  of 
the  British  North  American  Colonies  to  joint- stock 
banking  companies;  the  lack  of  a  satisfactory  circu 
lating  medium,  the  enterprise  of  private  capitalists, 
and  the  desire  of  the  legislature  to  facilitate  assist 
ance  to  the  commerce  and  agriculture  carried  on  by 
their  constituents.  The  banks  thus  chartered  secured 
the  right  to  perform,  within  the  legislature's  juris 
diction,  all  the  functions  pertaining  to  banking  in  its 
full  and  free  development,  and  to  carry  on  their  busi- 


352          The  Canadian  Banking  System,  1817-1890 

ness  with  very  few  restrictions.  As  in  the  legislation 
which  first  governed  them,  British  precedents  were 
followed,  so  their  practical  banking  was  a  copy  in 
many  respects  of  British  banking — Scotch  examples 
being  specially  affected  in  Lower  Canada.  And  as  in 
Scotch  banking,  the  simple  principle  of  paying  debts 
in  specie  on  demand,  enforced  by  mutual  competition 
of  the  banks,  and  sanctioned  as  it  was  by  the  capital 
punishment  of  charter  forfeiture,  proved  a  conserving 
factor  of  great  power,  little  noticed  by  the  public,  no 
doubt,  but  constant  and  relentless  in  its  operation. 
Down  to  1850,  if  we  except  the  season  of  banking 
agitation  in  Upper  Canada  preceding  the  crisis  of 
1837,  there  seems  to  have  been  very  little  originality 
among  the  colonists  in  regard  to  their  banks.  A  new 
charter  was  granted  from  time  to  time,  and  the  old 
ones  renewed,  but  the  new  restrictions  embodied  in 
the  legislation  were  of  British  origin,  opposed  in  most 
cases  by  legislatures  as  well  as  the  banks,  and 
adopted  only  after  peremptory  instructions  from  the 
Colonial  Office  in  Downing  street.  It  was  through 
these  authorities  also  that  the  antidote  was  provided 
for  the  leading  example  of  perverted  activity  in  cur 
rency  regulation  and  the  establishment  of  banks — 
the  Upper  Canada  banking  mania  of  1833  to  1837. 

In  1858,  however,  hard  times,  one  or  two  perse 
vering  agitators,  and  about  the  same  number  of  self- 
confident  theorists,  induced  the  law-makers  of  Canada 
to  try  a  system  of  banking  quite  alien  in  principles 
to  those  by  which  the  eight  existing  banks  were  gov 
erned  and  performed  their  functions.  The  effort  was 
proved  hopeless  in  four  years,  the  plan  having  lost 
on  its  faults.  The  legislature  gave  up  the  new  and 
returned  to  the  old  lines  in  the  provision  then  made 


Summary  and  Review  353 

for  increasing  the  number  of  banks.  At  the  same 
time  the  provincial  government  enlarged  on  the 
policy  of  exploiting  the  banks,  begun  by  the  circu 
lation  tax  of  1841,  by  requiring  new  banks,  and 
those  whose  capitals  were  increased,  to  invest  a  part 
of  their  capital  in  debentures  of  the  province.  The 
earliest  real  reforms  of  unquestionably  Canadian 
invention  are  met  in  1859,  when  the  first  measures 
respecting  warehouse  receipts  were  passed  at  the 
suggestion  of  the  banks.  On  three  occasions  the 
character  of  the  currenc}'  was  menaced  by  change; 
in  1841,  when  Lord  Sydenharn's  proposals  for  a  bank 
of  issue  were  overcome  largely  through  the  influence 
of  the  vested  interests;  in  1860,  when  the  maiden 
effort  of  Sir  A.  T.  Gait  at  currency  regulation  was 
presented,  but  was  rejected  for  its  preposterous 
nature;  in  1866,  when  their  friends  and  the  friends 
of  sound  policy  successfully  resisted  that  part  of  the 
same  minister's  project  by  which  the  banks  were  to 
be  deprived  of  the  right  to  issue  their  own  notes. 
The  local  legislatures  passed  the  laws,  that  is  under 
stood,  but  we  may  say — without,  however,  that  minute 
inquiry  into  causes  which  may  prompt  criticism 
for  a  priori  speculation — that  for  the  body  of  legis 
lative  restrictions  under  which  Canadian  banks  were 
working  in  1867,  British  precedent  (by  that  is  meant 
Scotch  as  well  as  English)  and  imperial  regulation 
were  chiefly  responsible.  The  same  remark  applies 
with  almost  equal  force  to  Nova  Scotia  and  New 
Brunswick  bank  charters. 

For  whatever  of  soundness  or  of  weakness  there 

was  in  their  practice,  the  banks,  of  course,  had  to 

praise  or  blame  themselves  and  the  conditions  where 

they  worked.     Those  conditions  were  such  that  men 

23 


354          The  Canadian  Banking  System,  1817-1890 

thought  the  development  of  the  country,  the  opening 
of  its  resources,  the  first,  practically,  of  all  economic 
considerations.     Toward  these  the  Canadian  banks 
rendered  yeoman    service,  increasing    their    capital 
and  extending  their  field  of  operation  as  fast,  proba 
bly,  as  the  growth  of  the  country  warranted.     The 
great  Bank  of    British  North   America,  which  had 
entered  all  the  provinces  in  1837,  rendered  incalcula 
ble  benefit  to  colonial  development  by  liberal  admin- 
istration  of    the  one  million  pounds  sterling  which 
formed  its  capital;  to  colonial  banking  by  the  con 
servative  character  of  its  management  and  by  the 
sound  banking  traditions  brought  by  its  officers  from 
the  schools  of  their  training,  the  Scotch  and  English 
banks.     In  1869  the  chief  offices  of  eleven  Canadian 
banks  were  filled  by  sometime  employes  of  the  Bank 
of  British    North    America.      The   practice   of  com 
mercial  banking,   to  which  the   Bank  of    Montreal 
had  steadily  adhered,  was  not  without  its  influence. 
It  was  a  simple  principle,  but  usually  trustworthy,  viz., 
to  require  that  the  paper  on  which  loans  are  granted 
shall  represent  an  exchange  of  commodities,  or  an 
increase  of  commodities.     At  the  last,  because,  per 
haps,  it  is  chief,   must  be  named   the   fruits  of  over 
forty  years  of  local  experience.     The  British  North 
American  banks    displayed    extraordinary    stability 
through  the  commercial  crises  and  financial  panics, 
which  left  such  serious  traces  in  the  United  States; 
but  they  met  their  losses,  and  the  warnings  of  1837-39, 
1848-50,  1857-59  were  all  for  the  safe  and  prudent 
conduct  of  business. 

The  one  bank  in  Canada,  which,  relying  in  the 
prestige  of  its  name  and  its  connections  with  the 
government,  followed  in  the  midst  of  the  competi- 


Summary  and  Review  355 

tion  of  1856,  the  same  policy  as  in  the  days  when 
alone,  autocratic,  and  all  powerful,  it  dispensed 
accommodation  to  Upper  Canadian  gentry,  land 
speculators  and  British  factors,  soon  met  its  just 
fate.  And  subsequent  years  brought  retribution  or 
misfortune  to  others,  so  that  of  the  eight  banks  in 
Canada  in  1851,  only  four  remain;  of  the  five  in  New 
Brunswick,  three  are  left.  But  we  should  add  that 
it  was  the  shareholders  who  suffered.  In  examining 
the  question  of  the  security  offered  by  Canadian 
banks,  it  has  appeared  that,  since  Confederation,  the 
total  loss  of  principal  ultimately  suffered  by  creditors 
of  banks  working  under  Dominion  legislation,  has 
been  less  than  $2,000,000.  The  record  for  the  years 
preceding  1867  is  hardly  less  admirable,  there  being 
no  failures  in  Nova  Scotia  or  Lower  Canada,  while 
in  New  Brunswick  the  double  liability  of  share 
holders  saved  the  banks'  creditors,  and  in  Upper 
Canada  the  failure  of  the  Bank  of  Upper  Canada 
was  the  only  one  which  inflicted  considerable  loss. 

The  efficiency  of  the  banks  during  this  period, 
their  services  to  the  country,  have  received  about 
all  the  positive  description  that  the  subject  permits. 
An  opinion  might  be  reached  by  considering  the 
friction  with  which  their  operations  were  carried 
on,  much  as  the  security  afforded  is  estimated  by 
the  loss  inflicted,  but  for  this  opinion  there  can  be 
no  exact  expression.  Spread  over  so  long  a  period, 
the  study  might  become  a  justification  of  banks. 
With  the  ethics  of  the  question,  we  are  not  con 
cerned;  for  us  it  is  sufficient  that  banks  are  estab 
lished  in  almost  every  community  where  there  is 
accumulation,  commerce  and  credit.  The  fact  that 
they  get  business  and  pay  profits,  indicates  the  need 


356  The  Canadian  Banking  System,  1817-1800 

for  their  services,  and  their  value.  In  the  next 
chapter,  moreover,  the  important  aspects  of  the 
question  of  efficiency  ought  to  appear  in  an  exam 
ination  of  the  characteristics,  practical  working  and 
possibilities  of  the  Canadian  banking  system  as  it  is 
now  established. 

II.  In  reviewing  the  history  of  banking  legislation 
since  Confederation,  an  American  is  at  once  impressed 
by  the  freedom  from  partisan  purposes  or  sectional 
feeling  displayed  in  the  treatment  of  banking  ques 
tions.  Without  that  freedom,  it  would  have  been 
difficult  fairly  to  weigh  the  evidence  collected  by  the 
committees  of  1867-69,  and  the  discussion  carried  on 
in  all  parts  of  the  country.  Without  it,  it  would 
have  been  difficult  also  tordefeat  the  dangerous  and 
reactionary  proposals  of  the  Government  in  which  Sir 
John  Rose  was  Minister  of  Finance.  Theirs  was  a 
strong  party,  and  had  the  party  discipline  been  per 
fect,  it  would  have  carried  the  Minister's  measures 
through  to  the  statute  book. 

Three  other  forces  appear  to  have  had  a  beneficial 
influence: 

(a)  Competition  has  quickly  exposed  weak,  care 
less  or  untrustworthy  management;  it  has  hastened 
the  withdrawal  or  loss  of  imprudently  invested  capi 
tal;  it  has  made  the  conditions  of  success  more  severe, 
and  so  has  immensely  increased  the  necessity  for 
vigilance,  caution  and  care.  Especially  through  the 
requirement  of  daily  settlements  has  the  stake  depend 
ing  on  the  constantly  liquid  character  of  a  bank's 
assets  been  indefinitely  raised,  (b)  The  salutary 
effect  of  competition  has  been  aided  by  the  trenchant 
criticism  which  the  increasing  clearness  and  fulness 
of  the  monthly  return  has  facilitated,  criticism  by 
each  banker  upon  the  others,  and  by  the  public  upon 


Summary  and  Review  357 

them  all.  Public  opinion,  moreover,  has  been  ex 
tremely  sensitive  to  the  defects  that  bank  failures 
have  exposed  in  the  established  system  of  safeguards. 
And  after  such  events  as  those  in  which  the  Mechanics' 
Bank  or  the  Central  and  London  Banks  figured,  pub 
lic  demands  for  reform  have  been  prompt,  general 
and  emphatic,  (c)  The  third  force  is  in  the  action  of 
the  bankers,  particularly  at  the  time  of  the  Bank  Act 
revisions.  They,  apparently,  have  been  influenced 
by  appreciation  of  their  own  privileges,  remembrance 
of  certain  painful  but  beneficial  experiences  in  times 
of  depression  and  trouble,  and  a  desire  to  remove 
from  the  banking  system  the  causes  "of  popular  dis 
satisfaction.  Their  own  suggestions  in  the  direction 
of  improvement,  and  the  reasons  they  gave  for  keep 
ing  the  important  features  of  the  bank  charters  and 
banking  system  in  force  when  the  Confederation  be 
gan,  have  been  described  at  some  length.  The  united 
efforts  of  the  bankers  as  individuals,  and  as  repre 
sentatives  of  their  customers  and  shareholders,  have 
certainly  been  productive  of  some  results.  Their 
services  will  be  esteemed  according  as  one  approves 
the  banking  system  which  they  have  helped  to 
preserve. 

We  cannot  rightly  conclude  as  to  the  attitude  of 
Parliament  towards  Canadian  banking  in  its  national, 
period  from  the  debates  alone,  or  from  the  numerous 
projects  that  have  been  supported  at  different  times 
in  the  House  of  Commons.  As  the  statesman  is 
judged,  not  by  what  he  says,  but  by  what  he  does, 
so,  to  a  great  extent,  must  we  conclude  as  to  Parlia 
ment.  Its  action  was  satisfactorily  described  by  Mr. 
Foster  in  1890:  "It  seems  to  have  been  the  purpose 
of  Parliament  not  to  interfere  violently  with  what 


358  The  Canadian  Banking  System,  1817-1890 

we  may  call  the  natural  growth  of  the  banking 
system  in  this  country."  "  It  also  appeared  to  be 
the  desire  of  Parliament  to  hedge  around  the  bank 
ing  system  which  then  prevailed  by  severer  condi 
tions  of  charter,  by  regulations  which  should  be 
especially  restrictive  upon  the  dealings  of  banks, 
especially  with  their  own  stock,  and  with  the  stock 
of  other  banks,  to  foster  the  laying  by  of  reserve 
capital,  and  by  a  judicious  requirement  of  returns, 
to  perfect  the  system  and  render  it  as  safe  as  possi 
ble  without  interfering  voluntarily  with  the  general 
principles  upon  which  banks  had  been  operated  from 
the  earlier  time."1 

One  of  the  strongest  contrasts  which  this  whole 
record  presents  to  such  a  history  of  banking  as  that 
of  the  United  States,  is  in  the  continuity  of  the  pro 
gress.  There  has  been  no  recurring  struggle  to 
establish  a  great  government  bank,  no  epidemic  of 
wild-cat  banking,  no  rejection  of  one  system  for 
experiment  with  another.  A  certain  continuity, 
without  doubt,  can  be  discovered  in  the  history  of 
any  banking  system.  Men  do  not  wholly  break  with 
the  past  or  build  on  foundations  entirely  new.  But 
down  to  the  present  day  Canadians  have  always  held 
to  the  plan  on  which  were  framed  the  statutes  gov 
erning  their  first  banks.  Additions  have  been  made, 
new  safeguards  against  public  loss  introduced,  limits 
restraining  corporate  activity  have  been  narrowed  in 
some  parts  and  widened  in  others,  a  few  arrange 
ments  for  the  advantage  of  the  government  have 
been  attached,  but  never  has  there  been  a  successful 
attempt  to  tear  down  the  fair  work  of  the  first 
builders  and  out  of  the  ruins  construct  anew.  When 

debates,  ut  supra,  1890,  p.  2235  et  seq. 


Summary  and  Review  ,359 

defects  have  appeared  in  its  structure,  Canadians 
have  not  forthwith  condemned  the  heritage  of  the 
past,  and  petulantly,  illogically  swept  it  away  to  make 
room  for  some  new,  untried  affair,  arranged  on  differ 
ent  lines;  after  study  of  the  trouble  they  have 
endeavored  by  some  slight  strengthening,  some 
little  alteration,  to  keep  and  enhance  the  certain 
benefits  of  what  they  already  possessed.  The  present 
Bank  Act  is  unquestionably  better,  more  careful,  more 
strongly  and  scientifically  drawn  than  any  previous 
legislation;  the  banking  practice  is  more  sound — the 
steady  improvement,  save  with  respect  to  investors' 
profits,  is  hardly  less  remarkable  than  the  continuity 
discernible  in  its  development  —  yet  the  economic 
character  of  the  functions  permitted  the  banks,  and 
the  methods  of  their  fulfilment  are  the  same  under 
the  Dominion  system  of  1890  as  under  the  provincial 
charters  of  1821. 


CHAPTER  X 

ON  THE  PRESENT  WORKING  OF  THE 
SYSTEM 

IN  following  the  course  of  banking  legislation  in 
Canada,  it  has  been  necessary  to  give  only  such  occa 
sional  reference  to  questions  of  banking  history  and 
the  economic  history  with  which  it  is  interwoven,  as 
was  essential  to  an  understanding  of  the  main  object 
of  the  inquiry.  The  fourth  part  of  a  complete  study, 
so  far  as  it  relates  to  existing  conditions,  will  form 
the  theme  of  this  chapter.  It  is  proposed  now  to 
look  at  the  Canadian  banking  system  in  its  present 
development,  to  examine  some  of  the  principles  of  its 
organization,  and  consider  certain  of  its  practical 
workings. 

§54.  —  CHARACTERIZATION    OF    THE    SYSTEM 

The  group  of  thirty-eight  joint -stock  corporations 
chartered  by  the  Parliament  of  Canada  and  now  in 
operation,  may  be  described  as  a  decentralized  sys 
tem  of  relatively  large,  joint-stock,  commercial  and 
industrial  banks,  privately  owned  and  managed,  but 
working  under  a  uniform  law,  and  subject  to  the 
supervision  and  discipline  of  the  Dominion  govern 
ment.  They  have  the  power  to  establish  branches. 
They  have  the  privilege,  exclusive  as  against  indi 
viduals  and  other  corporations,  of  issuing  promis- 


Characterization  of  the  System  361 

sory  notes  in  denominations  of  $5  and  multiples 
thereof,  for  circulation  as  money;  but  they  issue 
them  subject  to  the  prior  lien  of  the  note  holder 
against  the  whole  of  the  bank's  assets,  and  the  dou 
ble  liability  of  its  shareholders,  and  under  special 
restrictions  as  to  the  immediate  and  ultimate  pay 
ment  of  the  notes  and  their  redemption  at  par  at 
various  points  throughout  the  country.  They  have 
the  usual  powers  to  carry  on  business  in  discount, 
deposit,  exchange,  other  negotiable  securities,  coin 
and  bullion.  They  are  given  wide  privileges  in  the 
matter  of  loaning  upon  the  security  of  commodities 
in  process  of  manufacture,  in  store,  on  the  way  to 
market,  or  passing  into,  out  of,  or  through  the 
country  by  land,  rail  or  water;  they  may  loan  upon 
the  collateral  security  of  the  bonds,  stocks  and  de 
bentures  of  municipal  and  other  corporations,  or 
public  securities  of  any  description;  but  they  may 
not  loan  upon  the  security  of  stock  of  their  own  or 
any  other  Canadian  bank,  or  of  real  estate  or  mort 
gages  or  of  completed  ships. 

Their  joint  and  transferable  stocks,  and  the  limited 
liability  of  investors  in  these  corporations,  have  an 
obvious  explanation.  Without  them  it  would  be  im 
possible  to  secure  the  capitals  on  which  the  banks 
are  grounded.  As  it  is,  their  capital  comes  from  all 
parts  of  the  British  dominion,  the  stock  lists  showing 
that  some  is  held  at  the  very  antipodes,  in  India,  the 
Cape  Colony  and  Australia,  as  well  as  in  Great  Britain. 
That  each  bank  is  chartered  was  partly  due,  origi 
nally,  to  the  desire  of  proprietors  to  secure  the  limi 
tation  of  their  liability  for  the  debts  of  the  bank  to 
the  amount  of  their  subscriptions  merely.  The  lia 
bility  was  extended,  as  we  have  seen,  to  twice  the 


362  The  Canadian  Banking  System,  1817-1890 

amount  of  subscribed  shares,  in  compliance  with  im 
perial  regulations  respecting  colonial  banks,  and  the 
requirement  was  afterwards  modified  and  improved 
under  Confederation  as  a  safeguard  for  their  general 
creditors.  Where  the  shareholders  are  exempt  from 
the  additional  liability,  as  in  the  case  of  the  Bank  of 
British  North  America  and  the  French  bank  en  com- 
mandite  (principal  partners  liable  to  an  unlimited 
extent,  commanditaires  to  the  amount  of  their  sub 
scriptions  only),  the  precaution  is  taken  of  requiring 
that  note  issue  in  excess  of  75  per  cent,  of  the  unim 
paired  paid  capital  shall  be  covered  by  debentures  or 
money  deposited  with  the  Dominion  government. 

That  each  bank  must  be  separately  chartered, 
though  all  are  subject  to  the  same  general  Bank  Act, 
is  due  partly  to  the  historical  tendencies  in  Canadian 
legislation  with  respect  to  banks,  partly  to  the  prin 
ciple  generally  followed  by  English  governments,  to 
restrict  the  issue  of  notes,  intended  to  circulate  as 
money,  to  those  to  whom  the  power  is  expressly  con 
firmed.  We  have  inquired  into  the  origin  of  this 
power  of  Canadian  governments,  and  found  that, 
rather  than  from  the  mint  prerogative,  it  is  probably 
derived  from  the  general  powers  of  supervision  and 
regulation  exercised  by  the  state,  and  the  conditions 
which  parliaments  have  been  able  to  exact  in  return 
for  the  concessions  desired  by  bank  promoters.  In 
Canadian  law,  all  companies  established  under 
Dominion  legislation  are  incorporated  by  special 
charter,  although  in  some  cases  the  charters  of  a 
group  of  similar  corporations  are  continued  by  a 
general  act  applying  to  the  whole  group.  The  dis 
posal  of  bank  charters  has  never  been  marked  by  the 
fraud  or  partisanship  which  make  the  record  of  some 


Characterization  of  the  System  363 

of  the  American  commonwealths  so  discreditable  in 
this  respect,  and  caused  the  people  of  others  also 
to  forbid  to  their  legislatures  the  establishment  of 
banks  of  issue,1  to  require  referendum  of  the  ques 
tion  at  the  next  general  election,2  or  to  make 
all  but  adaptations  of  "free  banking,"  to  regu 
late  the  note  issue,  unconstitutional.3  Yet  charters 
have  been  easily  obtained,  too  easily  obtained. 
Since  Confederation  forty-four  charters  have  been 
granted,  and  only  five  proposed  charters  reported 
on  adversely  by  the  committees  on  private  bills. 
Twenty  of  the  forty-four  have  been  forfeited  for 
non-user.  Moreover,  the  authorized  banking  capi 
tal  of  Canada  has  never  been  fully  subscribed 
during  the  last  twenty-seven  years,  or  entirely  paid 
up.  Any  new  bank  may  now  be  chartered  so  soon 
as  the  projectors  convince  the  disinterested  commit 
tee  of  ministers  and  heads  of  departments  known  as 
the  Treasury  Board,  that  their  intentions  are  honest 
and  that  they  have  financial  backing.  A  favorable 
report  by  the  Treasury  Board  or  the  House  Commit 
tee  on  Banking  and  Currency  makes  the  bill  a  Gov 
ernment  measure  and  ensures  its  passing.  The  Cana 
dian  banks  have  enjoyed  no  monopoly  against  the 
entrance  of  new  competitors  bond  fide  into  banking, 
nor  have  the  shareholders  profited  from  investments 
in  stocks  which  others  might  not  obtain.  That  it  has 
been  difficult  for  enterprising  but  needy  speculators 
to  start  a  "bank"  in  order  to  borrow  the  money  of 

Arkansas,  California,  Oregon,  Nevada,  Texas  and  Washington. 

2Illinois,  Missouri,  Iowa,  Kansas,  Michigan  and  Wisconsin. 

3New  York,  Pennsylvania,  Indiana,  Illinois,  Michigan,  Iowa, 
Kansas,  North  and  South  Dakota.  Cf.  John  De  Witt  Warner, 
"Ten  per  cent,  tax  on  state  bank  notes,"  Speech  in  the  House  of 
Representatives,  2d  June,  1894,  Washington,  pp.  36,  38. 


364  The  Canadian  Banking  System,  1817-1890 

others  for  their  own  purposes,  or  that  investors  have 
gained  from  the  increased  prosperity  and  improved 
business  which  time  and  wise  management  brought 
td  the  bank  they  helped  to  start,  are  two  facts  resem 
bling  the  effects  of  exclusive  privileges,  to  which 
probably  no  one  will  object. 

The  "  commercial  and  industrial  "  characteristics 
of  the  chartered  banks  are  the  result  as  well  of  the 
restrictions  in  the  statutes  governing  them  as  of  the 
traditions  of  Scotch  and  English  commercial  banking, 
which  were  early  brought  over  to  Canada  and  eventu 
ally  became  well  established  principles  of  Canadian 
banking  practice. 

The  early  charters  limited  the  value  of  real  estate 
which  the  banks  might  hold,  and  ever  since  the  law 
has  forbidden  banks  to  engage  in  trade  or  to  take 
mortgages  or  lands  except  as  additional  security  for 
debts  previously  contracted.  In  the  sense  in  which 
I  shall  use  it,  industrial  will  also  connote  what  is 
sometimes  expressed  as  agricultural.  The  Canadian 
banks  are  agricultural  quite  as  much  as  they  are 
commercial,  but  their  loaning  to  farmers  is  ordinarily 
conditioned  by  the  prospect  of  an  increase  of  com 
modities  upon  which  it  will  be  possible  to  realize  soon, 
or  of  such  sales  as  result  in  speedy  returns.  In  land 
banking  the  chartered  banks  do  not  engage.  The 
ultimate  reason,  of  course,  is  in  the  necessity  for 
banks  of  issue  and  deposit  to  invest  their  funds  only 
in  easily  and  quickly  convertible  securities.  The 
best  form  of  such  assets  is  producers'  and  traders' 
notes  and  bills  of  exchange,  given  for  loans  of  circu 
lating  capital,  wherewith  to  assist  production,  facili 
tate  exchange  and  anticipate  returns.  Another 
cause  is  the  differentiation  of  credit  institutions. 


The  Principle  of  Large  Banks  365 

There  are  obvious  advantages  to  all  concerned  in 
leaving  land  banking  to  the  specialized  skill  and 
experience  of  loan  companies  and  building  societies. 


§55. THE  PRINCIPLE  OF  LARGE  BANKS 

The  Canadian  banks  are  few  in  number,  but  as  in 
dividuals  their  establishments  are  many,  their  busi 
ness  and  capitals  large.  In  the  United  States,  which 
has  a  population  something  over  thirteen  times  as 
numerous  as  that  of  Canada,  there  are  in  operation 
about  3,796  banks  of  the  national  system  alone,1  that 
is  to  say,  one  hundred  times  as  many  banks  as  in 
Canada.  Their  average  paid-up  capital  is  only  $143,- 
648;  that  of  the  Canadian  banks  $1,619,986,  or  twelve 
times  (11.9)  as  large;  their  total  capital  is  $545,288,- 
782,  not  quite  nine  times  that  of  the  Canadian  banks 
on  the  30th  June,  1894,  $61,559,473. 

The  figures  will  indicate  the  meaning  of  large  as 
used  in  this  connection.  The  adjective  adopted  ap 
plies  particularly  to  the  banks  domiciled  in  Ontario 
and  Quebec.  The  twenty-four  corporations  whose 
head  offices  are  in  these  provinces  have  a  total  autho 
rized  capital  of  $56,716,666,  of  which  $52,389,417  are 
paid-in.2  Seven  of  these,  five  being  French  banks  in 
the  province  of  Quebec,  have  capitals  of  less  than  a 
million  dollars,  and  of  the  French  banks,  four  have 
less  than  $500,000.  Of  the  larger  banks,  four  have 
capitals  of  more  than  four  and  a  half  millions  and  a 

1  Report  of  the  Comptroller  of  the  Currency,  4th  December,  1893, 
Washington,  1893,  p.  72. 

2The  statistics  are  from  "Report  of  the  Chartered  Banks,  etc.," 
for  the  month  ending  the  31st  December,  1893,  and  are  for  the  last 
business  day  of  that  month. 


366  The  Canadian  Banking  System,  1817-1890 

total  of  $28,866,666;  eight,  between  $1,400,000  and 
$2,500,000  and  a  total  of  $14,441,023;  and  five  between 
$1,000,000  and  $1,250,000,  with  a  total  of  $5,850,000. 
Nova  Scotia  has  two  banks  capitalized  for  more  than 
a  million,  the  sum  of  the  two  being  $2,600,000;  three 
for  $500,000  and  over,  total,  $1,700,000,  and  three  for 
$260,000  to  $300,000,  total  $809,788.  The  three  banks 
domiciled  in  New  Brunswick  have  a  total  capital  of 
$880,000;  the  one  in  British  Columbia,  $2,920,000, 
and  the  two  in  Prince  Edward  Island,  $247,388. 
Twenty  of  the  thirty  banks  in  operation  the  1st  Jan 
uary,  1894,  controlled  $54,677,689,  i.  e.,  88. 67  per  cent. 
of  the  total  banking  capital  of  the  Dominion,  then 
$61,546,593.  The  eighteen  smaller  banks  are  partly 
due  to  incorporation  of  the  small  local  institutions  of 
the  Maritime  Provinces  with  the  system  of  the  Domin 
ion  after  Confederation,  partly  to  the  demand  for 
banks  of  a  local  character,  strengthened  as  it  has 
been  by  municipal  pride  and  ambition,  partly  to  the 
endeavors,  which  those  who  made  them  would  doubt 
less  call  patriotic,  to  establish  banks  in  the  province 
of  Quebec,  owned  and  officered  by  persons  of  French 
blood,  and  finally  to  the  energy,  but  rather  qualified 
success,  of  certain  ambitious  persons  in  starting  and 
carrying  on  a  bank  under  their  own  direction  and 
management. 

In  the  main,  therefore,  the  system  is  one  of  a  small 
number  of  large  banks.  The  increased  capital  require 
ment  of  the  act  of  1890  is  a  legal  step  in  the  direction 
of  making  the  organization  of  new  banks  more  diffi- 
I  cult.  No  new  bank  has  entered  the  field  since  1885. 
Investors  prefer  the  stock  of  the  older  banks  that 
have  the  advantages  of  large  rests,  wide  connections 
and  firm  public  confidence.  Of  the  fourteen  banks 


The  Principle  of  Large  Banks  367 

chartered  in  1883  to  1893  inclusive,  only  five  could 
comply  with  the  requirements  of  the  Bank  Act  and 
actually  began  business;  three  of  the  five  have 
already  been  put  in  liquidation,  two  in  1887  and  one 
in  1893.  It  may  be  expected  that  hereafter  both 
people  and  Parliament  will  be  disposed  closely  to 
scrutinize  applications  for  new  charters.  The  enthu 
siasm  for  new  banks  prevailing  in  the  fifties,  the 
early  seventies  and  in  1882-1886,  has  abated.  Com 
pared  to  accumulations  and  the  supply  of  loanable 
capital,  there  is  less  intense  demand  for  it.  Security 
and  the  motives  of  the  depositor  are  now  weighty 
considerations.  Assistance  to  production  and  the 
development  of  the  country's  resources  have  lost  their 
former  predominant  importance.  The  tendency  of 
the  number  of  banks  to  remain  stationary,  or  even  to 
diminish,  so  pronounced  in  English  and  Scotch  bank 
ing,  is  thought  a  factor  of  considerable  influence  in 
the  present  Canadian  situation.  If  the  existing 
banks  keep  pace  with  the  development  of  the  country 
by  placing  branches  in  the  new  and  growing  districts, 
it  is  highly  probable  that  in  the  future  increased 
needs  for  banking  capital  will  be  supplied  through 
them;  that  banking  extension  will  be  chiefly  effected 
by  additions  to  the  capital  stocks  already  established, 
rather  than  by  the  formation  of  new  ones. 

The  almost  absolute  certainty  of  such  a  develop 
ment  is,  on  the  whole,  reassuring.  As  banks  grow 
older  they  usually,  gain  in  strength  and  stability. 
Eight  of  the  ten  failures  since  1867  have  been  of 
lately  organized  banks;  only  one  had  had  a  life  of 
fifteen  years,  one  of  nine,  another  of  eight,  three  of 
four  years  and  one  of  four  months.  The  principle  of 
large  banks,  furthermore,  has  been  adopted  by  almost 


368  The  Canadian  Banking  System,  1817-1890 

all  the  countries  of  Europe.  It  is  exemplified  in  the 
United  Kingdom,  as  well  by  the  Bank  of  England, 
as  by  the  joint-stock  and  Irish  and  Scotch  banks.  It 
is,  without  doubt,  necessarily  connected  with  branch 
banking;  in  Europe  and  England  the  plan  of  favor 
ing  large  banks  is  usually  combined  with  the  estab 
lishment  of  a  single  predominant  central  bank,  enjoy 
ing  special  privileges  and  close  relations  with  the 
government,  and  in  a  greater  or  less  degree  under  its 
management  or  control,  in  some  countries,  e.g.. 
Russia,  wholly  owned  by  the  state.  In  the  conti 
nental  sense  the  Canadian  banks  are  not  "large;" 
there  is  not  la  unite  des  banques,  but  la  pluralite 
Remission.  There  is  no  privileged  bank,  the  monop 
oly  feature  is  absent;  between  the  banks  there  is  a 
constant  competition.  As  Sir  Francis  Hincks  phrased 
it,  "they  are  all  on  the  same  footing."  The  govern 
ment  stands  towards  the  banks  in  a  supervisory, 
regulative,  and  if  need  be,  disciplinary  position. 
Supervision  must  not,  however,  be  confused  with  the 
technical  inspection  or  with  the  power  to  interfere 
with  bank  management  and  legitimate  business. 
The  only  bases  for  government  action  are  the  monthly 
returns,  the  special  returns  that  may  be  called  for, 
and  the  penal  provisions  of  the  Bank  Act.  Canadians 
have  thought  that  the  strict  observance  of  this  stat 
ute,  and  certain  punishments  for  violating  it,  are  best 
secured  when  government  is  independent  of  the  sub 
jects  of  supervision  and  uninterested  in  their  gains. 
There  is  then  no  national  or  government  bank;  the 
Bank  of  Montreal  is  merely  the  depository  of  the 
government,  their  bankers  and  fiscal  agents.  The 
banks  are  all  privately  owned  and  managed  in  the 


The  Principle  of  Large  Banks  369 

interests  of  their  shareholders  by  officers  whom  the 
several  boards  of  directors  appoint. 

It  is  in  connection  with  management  that  one  finds 
a  marked  advantage  in  large  banks.  Organization 
and  consolidation  tend  to  increase  efficiency,  and 
lower  the  cost  of  individual  services,  as  well  in 
banking  as  in  other  activities.  A  large  bank  with 
large  funds  is  able  to  spend  whatever  may  be  neces 
sary  to  secure  men  well  endowed  with  talents  of 
management.  Under  their  guidance,  at  the  head,  it 
can  employ  in  the  management  of  its  branches  men 
who,  acting  on  their  own  responsibilities,  e.  g.,  as 
managers  of  local  banks  handling  no  greater  funds, 
might  be  unequal  to  their  tasks.  There  is  added  effi 
ciency  at  the  center,  a  saving  in  expense  at  the 
branches.  And  of  this  double  gain  a  large  part  is 
not  infrequently  devoted  to  further  acquisition  of 
marked  banking  ability,  whereby  still  to  increase  the 
efficiency  of  the  bank's  organization,  the  safety  of 
its  business  and  the  profits  which  the  other  results  will 
promote.  Then  again,  the  directorate  of  a  large  bank 
is  more  likely  to  contain  a  greater  proportion  of  quite 
wealthy  men  than  a  small  one,  and  these,  presuma 
bly,  are  somewhat  abler,  as  careful  business  finan 
ciers,  than  others  with  less  tangible  evidence  of  eco 
nomic  success.  A  large  bank,  finally,  has  access  to 
a  wide  territory  and  a  great  variety  of  conditions  in 
which  to  train  its  officers.  By  transfer  from  one 
branch  to  another  they  gain  in  experience  and  versa 
tility,  are  freed  from  local  prejudice,  acquire  fami 
liarity  with  the  different  kinds  of  customers  and 
securities  with  which  the  diversified  business  of  the 
bank  is  concerned,  and  present  to  the  bank  itself  a 

24 


370  The  Canadian  Banking  System,  1817-1890 

wider    choice  of  well    known    men    from   whom  to 
select  incumbents  of  its  higher  offices. 

A  second  advantage  of  large  banks  is  their  great 
command  of  capital,  their  power  to  take  whatever 
proper  business  may  be  offered  them,  their  ability 
to  accommodate  their  customers  to  any  necessary 
amount.  With  this  comes  the  practical  possibility 
of  restricting  a  customer  to  one  bank,  of  requiring 
that  his  banking  account  be  kept  with  but  one  insti 
tution.  Whatever  advantage  accrues  from  restrict 
ing  the  credits  of  manufacturers  and  merchants  to 
the  limits  which  bankers  well  acquainted  with  the 
financial  position  of  their  customers  decide  are  safe, 
may  be  fully  realized  in  a  system  of  large  banks.  If 
the  customer  is  dissatisfied  with  the  regular  line  of 
credit  granted  to  him  he  may  remove  his  account  to 
another  bank.  A  Canadian  borrower  who  secures 
advances  from  two  or  more  banks  is  regarded  with 
suspicion  and  is  likely  to  have  his  custom  refused  by 
some  of  them  when  his  practices,  as  they  must  be, 
are  discovered.  Under  a  system  of  small  banks,  such 
as  the  national  banks  of  the  United  States,  the  prac 
tice  of  banking  with  a  single  concern  is  often  impos 
sible.  The  legitimate  needs  of  a  single  borrower 
often  exceed  the  funds  at  the  disposal  of  local  insti 
tutions,  and  should  these  be  adequate  the  national 
bank  is  forbidden  to  lend  more  than  ten  per  cent,  of 
its  paid-up  capital  stock  to  any  person,  firm  or  cor 
poration,  except  on  bills  of  exchange  and  commer 
cial  paper  owned  by  the  borrowers.  The  national 
banks,  accordingly,  are  obliged  in  some  cases  to  re 
discount  the  commercial  paper  offered  them,  in  others 
to  submit  to  their  customers  having  more  than  one 
banker.  A  third  escape  is  opened  to  the  borrower 


The  Principle  of  Large  Banks  371 

in  the  possibility  of  forwarding  his  paper  to  some 
bill-broker  in  the  nearest  large  city,  or  in  New  York, 
and  getting  it  discounted  there.  In  any  case  there 
is  a  complication  added  to  the  artificial  structure  of 
credit,  and  incompleteness  in  the  knowledge  which 
the  lender  should  have  of  the  debtor's  position.  In 
the  first  and  last  cases  an  intermediate  series  of 
debtors  and  creditors  may  enter  between  the  original 
borrower  and  the  ultimate  lender.  This  exaggerates 
the  sensitiveness  of  credit  by  widening  the  area  of 
interdependence,  a  result  quite  unnecessary  in  a  sys 
tem  of  large  banks. 

Third,  large  banks  have  great  stability  and  strength. 
The  security  they  afford  to  note  holders,  depositors 
and  other  creditors  is  usually  superior.  The  propor 
tion  of  capital,  rest  and  reserve  liability  of  share 
holders  to  the  bank's  general  liabilities  is  not  necessa 
rily  greater  than  in  the  case  of  small  banks.  There 
is  no  reason  why  public  confidence  in  the  large 
institutions,  as  expressed  by  note  circulation  and 
deposits,  should  be  less,  proportionately,  than  it  is 
in  the  small  bank.  The  liabilities  of  the  Canadian 
banks  to  shareholders  and  public  are  about  4.94 
times  their  paid-in  capital,  those  of  the  national  banks 
4.58  times  their  capital.  The  chances  are,  as  Eng 
lish  experience  shows,  that  the  larger  bank  will  en 
joy  the-  greater  business  for  each  unit  of  capital 
foundation.  Only  one  of  the  ten  insolvent  Canadian 
banks  had  a  capital  of  over  a  million  dollars.  Four  had 
capitals  of  $600,000  or  less,  and  the  other  five  capi 
tals  of  less  than  8400,000.  The  comparison  of  248 
insolvent  national  banks  out  of  the  4,930  organized, 
with  the  ten  insolvent  Canadian  banks  out  of  55  some 
time  in  operation  since  1867,  is  no  comparison  at  all. 


372          The  Canadian  Banking  System,  1817-1890 

The  thirty-eight  surviving  banks  have  over  500  dif 
ferent  establishments,  and  to  be  fair,  the  comparison 
must  be  made  between  the  number  of  establishments 
affected   by  insolvency.       With  one    exception   the 
Canadian  banks    in    question  were  small  and  their 
branches  few  in  number.     It  is  because  the  manage 
ment    of  a  large  bank  is  presumably  able,  and   its 
stake  depending  on   care  and  caution  so  great,  that 
the  creditors  of  a  large  bank  enjoy  a  high  degree  of 
security.       Every  instinct   of    self-preservation    de 
mands  that  unusual  risks  or  speculative  investments 
be  avoided;  that  safe  rather  than  brilliant  banking 
be  the  guiding  policy.     When  losses  are  incurred,  a 
large  bank    can    bear    and    write   off    defaults  that 
would    definitely    swamp  a  small   bank.       Take  for 
example  the  occasions  on  which  the   Bank  of  Mon 
treal,   though   not   explicit  as  to  the    amounts,  has 
acknowledged    the    loss    of   a   million    dollars,    the 
time   that    the    Merchants'  Bank   reduced   its  stock 
from  nine  millions  to  six,  or  that  the  Ontario  Bank 
wrote  $1,500,000  from  its  capital,  or  again  the  reduc 
tion  of  $1,100,000  on  account  of  bad  debts  made  in 
the  rest  of  the  Canadian  Bank  of  Commerce  in  1887. 
Lastly,  public    criticism,   a   valuable    restraint  in 
any  system,   is   more  acute   and  concentrated  when 
banks  are  large.     Confidence,  as  a  condition  prece 
dent  of  banking  development,  should  be  well-founded 
and  reasonable.   The  monthly  exposure  of  each  bank' s 
condition  by  the  publication  of  its  report  to  the  gov 
ernment  has  been  required  since  1854.     The  contin 
ued  expansion  of  the  Return  by  requirement  of  more 
thorough   analysis    and  minute    details  is   sufficient 
evidence  of  the  benefits  obtained  from  this  device. 
To-day,  not  only  the  character  of  each  bank's  assets 


The  Principle  of  Large  Banks  373 

and  debts,  how  many  are  secured  by  real  estate,  how 
many  are  overdue,  etc.,  practically  its  exact  condi 
tion,  but  also,  in  great  measure,  their  relations  to 
each  other,  may  be  ascertained  from  the  (l  statement 
of  banks  acting  under  charter."  The  publicity 
makes  government  supervision  possible,  and,  in  many 
cases,  forms  a  difficult  obstacle  to  violation  of  charter 
restrictions.  Public,  press  and  competitive  banks 
are  watchful  critics  of  the  return,  and  conclusions 
reached  by  outside  observers  or  the  newspaper  writers 
are  given  prompt  and  full  expression  each  month. 
But  where  banks  are  small  and  many,  the  attention 
of  the  critics  tends  to  be  dissipated,  their  interest  to 
be  diminished.  To  concentrate  criticism  its  objects 
must  be  few,  and  if  the  banks  are  few  they  must  be 
large. 

A  comparison  of  the  banks  of  Canada  and  those 
of  the  United  States  in  the  respect  just  discussed 
would  not,  it  is  likely,  be  a  very  serious  arraignment 
of  the  American  plan.  For  the  last  sixty  years  at 
least,  the  American  development,  though  its  tenden 
cies  have  been  unique,  seems  to  have  been  steadily 
on  the  lines  of  local,  particularistic  banking,  the 
different  parts  of  the  monetary  and  credit  organiza 
tion  being  united,  of  course,  through  an  intricate 
system  of  exchanges,  the  minor  centers  in  the  clear 
ing  house  and  redemption  cities,  and  the  great  center 
in  the  city  of  New  York.  The  American  national 
banks  would  suffer  most  from  the  comparison  with 
respect  to  the  command  of  funds  and  the  power  to 
accommodate  customers  pertaining  to  individuals  of 
the  system.  They  are  not  subject  to  such  widespread 
or  keen  public  criticism,  but  this  is  offset  by  the  useful 
though  sometimes  misleading  official  inspection,  a 


374          The  Canadian  Banking  System,  1817-1890 

safeguard  which  is  practicable  in  any  sense  only 
where  a  bank  is  confined  to  one  locality  and  office. 
Then,  too,  the  creditors  of  most  of  the  banks  are 
chiefly  local,  and  persons  in  other  districts  are  com 
paratively  uninterested  in  their  condition.  For  sta 
bility,  if  that  is  to  mean  the  continued  solvency  of 
all  the  banking  offices  of  a  system,  and  the  continued 
power  to  protect  solvent  and  worthy  customers  at 
critical  moments,  the  Canadian  banks  have  a  some 
what  better  record.  As  to  security,  an  exact  com 
parison  on  the  basis  of  loss  suffered  by  creditors  is 
not  possible.  The  affairs  of  123  insolvent  national 
banks  are  not  yet  finally  closed.1  Even  if  the  pro 
portion  borne  by  total  loss  of  principal  in  thirty  years 
to  the  total  liabilities  of  the  existing  banks  of  the 
national  system,  should  appear  to  be  less  than  that 
borne  by  Canadian  losses  in  the  last  twenty-seven 
years  to  the  present  liabilities  of  the  Canadian  banks 
to  the  public,  the  conclusion  as  to  security  would  not 
be  unreservedly  in  favor  of  American  banking. 
Operation  under  state  laws  has  usually  been  a 
resource  for  those  who  felt  hampered  by  the  severer 
conditions  of  the  National  Bank  Act.  In  Canada, 
however,  the  conduct  of  joint-stock  banking  in  all 
its  branches  is  possible  only  under  the  legislation  of 
the  Dominion.  A  rather  careful  estimate,  moreover, 
points  to  the  probability  that  when  ascertained  the 
proportion  borne  by  loss  suffered  from  banks  under 
federal  laws  is  higher  than  that  borne  by  the  loss 
suffered  from  Canadian  banks  subject  to  the  Bank 
Act.2  Another  aspect  of  the  question  of  stability 

Comptroller's  Report,  1893,  pp.  206-213. 

2The  proportion  of  approved  claims  against  insolvent  national 
banks  which  will  never  be  paid,  will  not  fall  short,  probably,  of 


The  Principle  of  Branch  Banking  375 

comes  to  view  in  the  fact  that  since  1837  there  has 
been  no  general  suspension  of  specie  payments  in 
Canada,  or  need  for  resorting  to  such  devices  as 
clearing  house  certificates,  checks  payable  only 
through  the  clearing  house,  or  the  unauthorized  issue 
of  scrip. 


§  56 — THE  PRINCIPLE  OF  BRANCH  BANKING 

For  the  purposes  of  this  section,  branch  banking 
may  be  defined  as  the  prosecution,  under  the  control 
of  the  parent  bank,  and  upon  its  general  capital  and 
means,  of  a  business  in  banking  credits,  at  offices 
established  in  places  other  than  the  domicile  of  the 
parent  bank.  It  is  most  practicable  and  profitable 
when  the  parent  bank  is  large,  and  when  it  enjoys 
the  privilege  of  issuing  notes  upon  its  general  credit, 
e.  g.,  the  Scotch  banks,  the  Australian  banks,  the  two 
Banks  of  the  United  States.  The  Canadian  statutes 
which  permit  it,  and  the  Canadian  practice  of  using 
the  power  to  establish  branches,  agree  with  the  prin 
cipal  banking  systems  of  Europe,  of  Great  Britain 
and  the  British  colonies.  Branch  banking  has  been 
widely  extended  in  Canada;  on  the  1st  June,  1894, 
there  were,  exclusive  of  city  branches,  465  establish 
ments  of  the  chartered  banks  in  259  different  locali 
ties.1  The  number  of  branches  established  by  each 
bank  varies  somewhat,  according  to  its  capital,  the 

$25,000,000.  The  liabilities  of  the  national  banks,  less  capital  stock 
and  surplus  fund,  were  $2,284,272,164  on  the  31st  October,  1893.  Our 
computation  of  Canadian  losses  since  1867  was  $1,922,000  ;  the  total 
liabilities  of  the  banks  to  their  creditors  on  the  31st  December, 
1893,  $218,662,965.  The  percentage  in  the  first  case  is  1.094;  in  the 
second,. .874. 

:See  note  1,  next  page. 


376  The  Canadian  Banking  System,  1817-1890 

character  of  its  business  and  the  policy  of  its  man 
agement.  The  Bank  of  Montreal  has  thirty- eight 
branches  in  Canada,  and  New  York,  Chicago  and 
London  offices;  the  Bank  of  British  Columbia  has 
ten  branches,  of  which  four  are  in  the  United  States. 
The  Canadian  Bank  of  Commerce  has  fifty-one 
branches  and  an  agency  in  New  York;  the  Merchants' 
Bank  of  Canada  has  thirty  branches  and  a  New  York 
agency.  The  Bank  of  Nova  Scotia  has  twenty-six 
establishments  in  Canada,  an  agency  in  Chicago  and 
another  in  Kingston,  Jamaica.  The  Molsons'  Bank 
has  twenty-three  branches;  the  Merchants'  Bank  of 
Halifax  and  the  Imperial  Bank  of  Canada  each 
twenty-two  agencies.  Twenty-two  of  the  banks 
have  ten  or  more  offices,  eight  but  one  each,  and 
eight  from  two  to  nine  offices. 

Certain  advantages,  both  to  the  Canadian  public 
and  to  their  banks,  of  which  branch  banking  is  pro 
ductive,  may  be  summarized  under  the  following 
heads. 

I.  The  collection  and  distribution  of  loanable  cap 
ital  from  and  to  different  parts  of  the  country  are 
accomplished  at  the  minimum  of  expense  and  with 
the  maximum  of  thoroughness.  When  the  instru- 

irThe  territorial  distribution  of  these  branches  is  best  indicated 
specifically: 


Branches  in 

Places 
134 
47 
38 
16 
8 
7 
6 
3 

No.  of  OflQces 
243 
82 
62 
31 
19 
13 
8 
7 

Nova  Scotia                       •  •  •       •  •  •  

New  Brunswick  

IVIanitoba                           .... 

British  Columbia      

Northwest  Territory                    

Prince  Edward  Island    

259 

465 

The  Bankers'  Register,  Chicago,  1894,  pp.  346-355. 


The  Principle  of  Branch  Banking  377 

ment  of  both  the  services  is  a  single  organization 
such  as  a  large  bank  with  numerous  branches,  the 
task  is  better  performed,  it  would  seem,  and  certainly 
at  less  cost  than  when  two  or  more  banks  are  neces 
sary  to  the  same  series  of  services,  and  each  must  be 
rewarded  for  its  part.  The  same  Canadian  bank 
that  collects  capital  from  the  older,  accumulating 
districts  in  the  form  of  deposits,  transfers  it  to  the 
centers  of  industry  and  commerce,  or  to  those  districts 
for  whose  development  and  activities  more  capital  is 
needed  than  can  be  supplied  from  the  local  stock. 
The  process  of  intelligent  distribution  is  facilitated 
by  the  knowledge  of  local  conditions  had  by  the 
parent  bank  from  the  officers  of  its  branches,  and  the 
consequent  ability  to  loan  when  the  demand  is  great, 
with  the  same  safety  as  a  local  lender.  Where  the 
banks  are  merely  local,  the  specialized  knowledge 
frequently  lacks  the  necessary  funds.  The  banks  of 
Massachusetts,  e.g.,  may  have  hard  work  to  find  sat 
isfactory  investments  at  4  per  cent.,  while  Colorado 
banks  are  offered  more  good  discounts  at  10  per  cent, 
than  they  can  take.  The  rates  of  discount  on  good 
paper  in  different  parts  of  the  United  States  at 
arbitrary  dates  in  1891,  1892,  1893,  are  a  further 
illustration.1 

Differences  in  the  United  States  would  probably  be 
much  greater  were  it  not  for  the  action  of  western 
banks  as  agents  in  placing  loans  for  sister  banks  in 
the  East;  between  the  rates  in  western  towns  of  less 
importance  and  those  in  the  financial  centers  of  the 
East,  the  differences  are  much  greater  than  the  above 
figures  for  the  larger  markets  indicate. 

But  the  Canadian  banks  are  not  local;  their  inter 
ests  and  their  activity  are  bounded,  not  by  the  confines 
note  1,  next  page. 


378 


The  Canadian  Banking  System,  1817-1890 


of  a  single  town,  but  by  the  borders  of  an  entire 
province  or  of  the  Dominion  itself.  They  borrow  cap 
ital  where  they  can  get  it  and  loan  it  where  it  is 
needed.  "So  perfectly  is  this  distribution  of  capital 
made,  that  as  between  the  highest  class  borrower  in 
Montreal  or  Toronto,  and  the  ordinary  merchant  in 
the  Northwest,  the  difference  in  interest  paid  is  not 
more  than  one  to  two  per  cent."2  On  loans  of  equal 
security  the  interest  charged  will  not  vary  one  per 
cent,  the  country  over,  whether  the  debt  is  contracted 
in  Halifax,  Quebec,  Hamilton,  Calgary  or  Vancouver. 


1  Rates  of  Discount  charged  on  time  loans  in  different  cities  in  the 
United  States  during  the  week  preceding  the  day  on  which  they 
were  reported  in  Bradstreet's: 


Boston 

Philadelphia. . 

Chicago 

St.  Louis 

Detroit 

Kansas  City  . . 

New  Orleans. . 

St.  Joseph 

Memphis 

Portland,  Ore. 

Galveston 

Seattle 

Louisville 

Milwaukee 

Cincinnati 

Providence  ... 

Omaha 

Baltimore 

Pittsburg 

San  Francisco 

St.  Paul 

Houston 

Denver 


1890 
Sept.  27 


1891 


May  30, Nov.  21 


5@7 


4@6 
®< 

(5 


6@7 

i-f 
t 

6 


8@10 


8@10 


8 
5@6 


1892 


Apr.  16  Dec.  17  Mar.  25  Sept.  2 


4@G 


6 
4@6 


6@7 


o 
6@7 


1893 


10@1210@12 
I  7 


10@12 


8@10 


6 
8 
5|@6 


10 


8@10 

7@8 

10@12 

7@8 

7 


8 

8 

10 


8@10 

8 

8 

10 


2B.  E.  Walker,  "  Banking  in  Canada,"  in  Journal  of  the  Canadian 
Bankers'  Association,  vol.  i,  p.  18. 


The  Principle  of  Branch  Banking  379 

This  unqualified  advantage  may  be  summed  up  as 
a  national  equalization  of  the  rate  of  interest  through 
economies  in  the  cost  of  transferring  capital,  and  a 
highly  effective  system  of  arbitrage. 

II.  Ample  facilities  are  afforded  to  small  towns, 
isolated  borrowers  and  the  country  generally.  For 
the  purposes  of  good  investment  a  branch  has  re 
sources  limited  only  by  available  funds  of  the  great 
bank  of  which  it  is  a  part.  The  petroleum  producers, 
the  great  wheat  farmers  in  the  Northwest,  the  distil 
lers  in  small  Ontario  towns,  or  the  packing  houses 
and  lumber  firms  in  little  New  Brunswick  villages, 
have,  almost  at  their  doors,  agencies  of  the  greatest 
banks  in  the  Dominion,  ready  and  able  to  advance  on 
the  security  of  unmarketed  products  or  goods  in 
course  of  manufacture,  to  buy  their  sterling  exchange 
or  to  discount  the  paper  arising  from  other  transac 
tions  already  concluded.  Produce  shippers  have 
access  to  like  conveniences,  no  matter,  practically, 
how  remote  or  unimportant  the  district  in  which  they 
operate.  No  worthy  industry,  whatever  its  distance 
from  the  centers,  need  droop  for  lack  of  banking 
facilities.  The  agricultural  districts  are  provided 
with  places  near  at  hand  for  the  deposit  of  their 
savings,  and  they  are  given  liberal  accommodation, 
at  seed  time,  before  harvest  and  whenever  else  there 
is  a  prospect  that  the  use  of  the  loan  will  provide  the 
means  for  its  payment.  The  degree  in  which  the 
description  "agricultural"  applies  to  Canadian  banks 
is  seldom  noticed  in  accounts  of  the  system,  but  it  is 
increasing  from  year  to  year.  In  1881,  when  there 
were  only  two  less  banks  than  now,  the  number  of 
branches  was  287. 1  In  1890  there  were  444  branches, 

1George  Hague,  "Banking  in  Canada,"  in  Proceedings  of  the 
Convention  of  the  American  Bankers'  Association,  New  York,  1881, 
p.  99. 


380          The  Canadian  Banking  System,  1817-1890 

and  225  of  these  were  in  towns  without  the  office  of 
another  chartered  bank.1  Correct  judgment,  it  is 
believed,  will  acknowledge  from  the  Canadian  banks 
services  to  the  agricultural  development  of  their 
country  as  great  as  those  for  which  the  Scotch  banks 
have  been  universally  esteemed. 

As  from  the  first,  there  arise  from  this  group  of 
advantages  due  largely  to  branch  banking,  a  level 
ling  of  the  rate  of  interest,  and  also  increased  econo 
mies  of  time  in  the  transportation  and  marketing  of 
goods. 

III.  The  risks  of  investment  are  distributed  and 
varied,  and  the  banks  are  more  certain  of  regular 
profits.  Unlike  that  of  the  national  banks,  their 
prosperity  is  not  largely  dependent  upon  the  fortunes 
of  single  towns  or  sections.  Nothing  is  more  empha 
sized  by  Canadian  bank  managers  than  the  inevitable 
condition  of  a  bank's  gain  or  loss,  viz.,  the  prosperity 
of  its  customers  as  a  whole.  Under  the  branch  sys 
tem,  however,  the  losses,  bad  harvests,  or  depression 
in  one  part  of  a  bank's  territory  are  set  off  against 
the  good  crops  and  more  successful  issue  of  the  year's 
business  in  another.  This,  to  a  great  extent,  was 
the  case  with  losses  incurred  by  the  banks  with 
branches  in  Manitoba,  after  the  Northwest  boom  col 
lapsed  in  1882,  and  dozens  of  other  examples  might 
be  cited  from  the  reports  of  shareholders'  annual 
meetings.  It  may  be  objected  that  all  this  involves 
having  too  many  irons  in  the  fire,  just  as  it  may  be 
said  that  in  affording  ample  facility  to  the  borrowers 
of  his  neighborhood  a  branch  manager  may  exceed 
the  limit  of  safety.  But  the  first  objection  will  not 
hold  if  the  organization  of  the  bank  is  thorough;  the 

1  Garland,  ut  supra,  p.  35. 


The  Principle  of  Branch  Banking  381 

second  will  be  due  to  faults  in  judgment  from  which 
no  man  is  sure  to  be  free.  Branch  banking  is  still  a 
case  of  not  carrying  all  the  eggs  in  one  basket;  the 
gain  in  stability  and  the  strength  to  survive  local 
disasters  is  enormous. 

IV.  The  establishment  of  branches  gives  the  parent 
bank  opportunities  to  extend  its  note  circulation.   As 
circulation  is    issued    as    a   general    charge  against 
assets,  country  banking  thus  makes  possible  a  special 

, addition  to  the  credit  loaning  powers  of  the  banks, 
which  in  so  far  economizes  material  capital  without 
loss  of  its  beneficial  effects.  The  banks  gain  further 
from  the  slightly  higher  rate  of  interest  (an  extra  one- 
half  to  one  and  one-half  per  cent.),  secured  from  coun 
try  customers,  partly  because  of  the  technical  inferi 
ority  of  the  security  they  offer,  partly  because  of  the 
less  severe  competition  in  such  localities.  Yet,  valu 
able  as  their  services  are  to  the  community,  many  of 
the  country  offices  return  but  slight  profit.  Many 
could  not  be  kept  up  were  it  not  for  the  increase  of 
circulation  which  they  promote  and  the  possibility  of 
saving  interest  on  till-money  by  using  unissued  notes 
for  the  purpose.  These  features  of  bank  note  issues 
like  the  Canadian  will  be  discussed  more  fully  in  §  58. 

V.  A  fifth  advantage  lies  in  the  centralization  of 
bank  management,  and  nationalization,  so  to  speak, 
of  banking  policy.     I  have  called  the  Canadian  sys 
tem   decentralized,   because   there    is    no    enormous 
central   bank    domineering  over  all  the  others,  and 
because  there  is  competition,  much  of  it,  too,  in  every 
department  of  banking.     In  another  sense  the  banks 
are  centered;  seven  of  them  with  capital  of  $14,560,- 
958,  have  their  head  offices  in  Toronto;  eight,  with 
capital  of  $27,756,266,  in  Montreal;  three  banks  with 


382  The  Canadian  Banking  System,  1817-1890 

capital  of  $4,900,000  are  domiciled  in  Quebec,  and 
five,  with  stocks  amounting  to  $4,300,000,  have  their 
head  offices  in  Halifax.  Twenty-three  banks  with  a 
total  capital  of  $51,517,224,  are  superintended  from 
the  two  focusing  points  of  Canadian  commerce  and 
finance.  Their  superintendence,  however,  is  not 
more  concerned  for  the  advantage  of  traders  and 
producers  in  these  localities  than  of  those  elsewhere. 
The  business  of  the  banks  comes  from  every  part  of 
the  country;  the  obligation  to  "take  care  of  custom 
ers"  is  as  strong  in  the  lumber  village  of  northern 
Ontario  as  in  St.  James  street,  Montreal.  Here  comes 
the  nationalization  of  banking  policy;  the  interests 
and  responsibilities  of  the  banks  are  wide;  the  meas 
ures  they  take  at  one  time  and  another  must  be  broad 
of  purpose  and  generally  beneficial  to  correspond. 
In  times  of  stringency  or  impending  panic  they  must 
heed  the  welfare  of  their  province  or  of  the  entire 
country;  upon  it  depends  their  own.  The  branch 
system,  moreover,  prevents  to  a  great  degree  the 
antagonism  of  interests  in  a  panic  or  time  of  con 
traction  between  a  great  number  of  establishments, 
each  selfishly  intent  on  self-preservation,  and  anxious 
to  store  away  all  possible  cash  against  the  threatened 
day  of  trial.  The  reserves  of  branches  are  the  re 
serves  of  parent  banks;  the  country  offices  have  the 
same  interests  as  the  city  establishments ;  the 
branches,  further,  are  subject  to  orders  from  the 
head  offices  at  the  centers.  There  may  be  hoarding, 
but  reserves  are  not  scattered  through  the  country; 
they  are  kept  at  the  centers  where  the  heaviest  pay 
ments  are  eventually  set  off  against  each  other. 
There  is  no  parallel  in  Canadian  experience  to  the 
American  crisis  of  1893,  and  so  far  as  that  action  at 


TJie  Principle  of  Branch  Banking  383 

cross  purposes  by  city  and  country  banks  which  pre 
ceded  the  culmination  of  the  difficulty  is  concerned, 
a  parallel  would  be  impossible. 

VI.  Branch  banking  tends  to  promote  more  judi 
cious  and  impartial  administration  of  the  lending  pow 
ers  of  the  bank  than  local  banking.     The  confidential 
character  of  banking  transactions  is  better  secured. 
The  manager  of  a  branch  has  ordinarily  received  his 
training  in  a  variety   of  situations.     He  is  likely  to 
deal  as  a  banker  with  the  clients  of  his  branch,  and 
not  to  be  exposed,  not  to  be  subject,  to  the  influences 
of  friendship,  family  ties  and  business  connections; 
in  all  important  questions  he  must  consult  his  head 
office.     Instead   of  having   his    affairs  discussed  by 
his  acquaintances,  perhaps  by  his  competitors  on  the 
board   of  a  local   bank,  the  applicant  for  credit  re 
ceives  impartial  treatment   from  the  remote  and  dis 
interested  general  manager  on   the  basis  of  his  own 
and  the  branch  manager's  statements  of  the  facts 
necessary  to  a  decision. 

VII.  The    educative  effect    of   this    type   of  bank 
organization  is  not   without  importance.     A  certain 
improvement  in  the  commercial  habits  of  the  people 
with    whom  the    business    is    carried    on  is  usually 
ascribed  to  the  introduction  of  any  sort  of  banking. 
They  show  greater  promptness   in   discharging  pay 
ments  and  other  contracts,   more  careful  calculation 
of  business  chances    and    stronger  habits   of   thrift. 
The  familiar  example  of  the   Scotch  has  been  over 
used  perhaps,  although  their  banking  system  seems 
peculiarly  calculated  to  promote  these  results.    What 
special  benefits  of  this  character  the  branch  system 
favors  have  been  touched  upon  in  the  preceding  para 
graph;  they  are  largely  due  to  the  excellent  training 


384          The  Canadian  Banking  System,  1817-1890 

of  branch  managers,  their  lack  of  prejudice  and  the 
possibility  through  them  to  bring  close  to  the  people 
the  exact  and  thorough  methods  of  the  highest  type 
of  urban  banking.  Nearly  every  Canadian  bank  con 
ducts  a  " savings  department"  as  an  important  part 
of  its  mechanism  for  the  collection  of  the  spare  capi 
tal  of  the  country.  They  also  pay  interest  on  depos 
its,  seldom  on  current  balances  of  active  accounts, 
but  always  practically  on  deposits  which,  being  pay 
able  after  notice  or  on  a  fixed  day,  are  regarded  by 
the  makers  in  the  light  of  investments.  These  de 
posits,  on  the  31st  December,  1893,  were  to  deposits 
payable  on  demand  as  1,078  to  625.  By  this  means 
the  inducements  held  out  to  thrift  are  immensely 
strengthened,  the  depositing  habit  is  cultivated,  and 
both  the  country  and  the  banks  gain  from  the  utili 
zation  of  well  nigh  every  dollar  not  required  for  the 
immediate  purposes  of  the  owners. 

The  principles  of  branch  banking  and  of  large 
banks,  and  the  advantages  to  which  they  conduce, 
are  not,  as  the  reader  has  doubtless  already  com 
plained,  without  their  reverse  side.  But  certain  evils 
arising  in  a  system  of  which  they  are  characteristic 
have  been  noticed  in  the  historical  sketch  of  the  pre 
ceding  chapters.  To  realize  the  possibilities  of  the 
Canadian  system,  each  bank  must  have  a  strong  and 
thorough  central  organization,  able,  cautious  and 
vigilant  management,  a  trained  and  disciplined  staff, 
rigid  inspection  by  officers  of  the  principal  establish 
ment,  specially  detailed  for  the  purpose,  and  the  pur 
pose  both  to  observe  the  Bank  Act  and  otherwise  to 
keep  within  the  bounds  of  safe  and  legitimate  bank 
ing.  Where  any  of  these  are  unduly  deficient,  the 
shareholders  are  sure  to  suffer  loss,  but  through  com- 


TJie  Principle  of  Branch  Banking  385 

petition  and  other  safeguards,  it  will  become  so  soon 
apparent  that,  as  a  rule,  the  creditors  of  the  bank 
will  be  saved  from  injury. 

.  Another  caution  may  be  ventured  with  regard  to 
the   attention    given  to  banking   profits    under   the 
Canadian  system.     The  apparent  one-sidedness  dis 
appears  when  it  is  seen  that  the  advantage   of  the 
banks  is  also,  in  the  truest  sense,  the  advantage  of 
the    public.      Ministers    and    legislators    have  often 
remarked,  «  Banks  are  chartered  for  the  benefit  of 
the  public."     They  find  the  real  justification  of  their 
banking  system,  without  doubt,  in  the  efficiency  with 
which  it  promotes  that   benefit,   not  in  the  success 
with  which  the  banks  amass  gains  for  their  share 
holders.     Banking  in  Canada,  we  must  repeat,  is  no 
monopoly.       To    bring   forward    the    service    which 
banks  afford,  at  least  the  normal  return  from  enter 
prises  of  like  difficulty  and  risks  must  be  assured  to 
investments  in  their  stock.     Whatever  increases  the 
security  of  banking  investments  and  thus  diminishes 
the  premium  for  risk,  whatever   extends   the  fields 
from  which   the  banks  can   receive  their  profits  or 
increases  the  efficiency  of  capital  by  permitting  a 
larger  volume  of  credit  to  be  based  upon  it,  dimin 
ishes,  pro  tanto,  the  cost  of  the  individual  services 
which  the  banks  afford.     The  competition  between 
Canadian  banks  is  of  the  most  free  and  active  variety. 
The  value  of  the  bank's  services,   therefore,  cannot 
rise  above  their  cost — the  lowest  return  which  will 
induce  sufficient  expenditure  of  capital  and  labor  in 
the  production   of  such   services.     That  cost  is  ex 
pressed    for   the    public    by   the    rate    of    discount. 
Reduced  cost  means  reduced  rate  of  discount,  and  in 

25 


386  The  Canadian  Banking  System,  1817-1890 

this  great  respect,  at  all  events,  the  interest  of  the 
banks  and  the  interest  of  the  public  are  one  and  the 
same. 


g  57. — THE  CANADIAN  SYSTEM  OF  NOTE  ISSUE 

Each  Canadian  chartered  bank  has  the  power  to 
issue  its  promissory  notes,  payable  to  bearer  on 
demand,  for  circulation  as  money.  The  exercise  of 
this  power  is  restricted  by  no  requirement  to  hold  a 
minimum  reserve  against  the  notes  issued,  or  to 
secure  them  by  the  pledge  of  definite  asse'ts;  but  it 
is  confined  to  the  corporations  to  whom  the  power  is 
expressly  confirmed,  and  they  may  not  issue  in  excess 
of  their  unimpaired  paid-up  capital  stock.  Except 
in  so  far  as  they  are  the  first  charge  upon  all  the 
assets  of  an  insolvent  bank,  the  notes  form  a  liability 
indistinguishable  in  its  essence  as  a  debt,  from  such 
other  liabilities  as  deposits  payable  on  demand.  In 
one  sense  it  is  a  matter  of  indifference  to  Canadian 
bankers  whether  their  liabilities  to  the  public  are 
incurred  by  issuing  notes  or  giving  book  credits  to 
their  depositors.  As  Alexander  Hamilton  clearly 
proved,  at  almost  the  very  inception  of  American 
banking,  it  is  the  interest  on  the  securities  purchased 
by  his  credit,  that  concerns  the  banker,  not  the  par 
ticular  form  in  which  that  credit  is  used.1 

From  the  general  economic  and  legal  standpoint, 
these  bank  notes  must  be  viewed  as  a  part,  and 
and  only  a  small  part,  of  that  vast  volume  of 

deport  on  a  National  Bank,  13th  December,  1790.  Clark  and 
Hall,  "  Legislative  and  Documentary  History  of  the  Bank  of  the 
United  States,"  Washington,  1832,  p.  16.  Cf/Dunbar,  * 'Chapters  on 
the  Theory  and  History  of  Banking,"  New  York,  1891,  p.  56. 


The  Canadian  System  of  Note  Issue  387 

bills  of  exchange,  checks  and  other  instruments 
of  credit  or  evidences  of  rights  to  demand  money, 
which  are  more  and  more  used  in  convenient  and 
economical  substitution  for  the  coined  precious 
metals  as  media  of  exchange.  Bank  notes  are  only 
one  type  of  the  devices  by  means  of  which  modern 
commerce  is  becoming  more  directly  the  barter  of 
goods  for  goods,  and  through  which  the  use  of  money 
itself1  as  a  means  of  transferring  value,  is  being  con 
stantly  economized.  When  subject  to  no  other  regu 
lation  than  that  of  the  commercial  law  enforcing  the 
obligation  of  which  they  form  the  evidence,  the 
extent  to  which  these  various  instruments  of  credit 
are  issued  or  retired  is  dependent  on  the  need  for 
their  issue;  in  other  words,  the  circulating  medium 
which  they  compose  is  naturally  elastic.  Tlie  person 
who  accepts  them  in  satisfaction  of  a  debt,  does  so 
at  his  own  option,  and,  though  protected  in  many 
cases  by  the  continued  liability  of  the  transferor,  at 
his  own  risk.  When  bank  notes  are  regarded  merely 
as  a  liability  no  different  in  substance  from  deposits, 
it  is  quite  true  that  depositors  seem  to  have  a  "claim 
for  equal  consideration  "  with  the  note  holders.  At 
all  events,  there  is  no  reason  why  that  part  of  the 
circulating  medium  composed  of  notes  should  be  less 
elastic  than  that  based  on  deposits  and  given  form 
as  checks. 

A  high  American  authority  has  said  that  legisla 
tors  have  generally  failed  to  perceive  the  similarity 
of  the  two  kinds  of  liability;  that  the  appropriate 

1  Money  is  here  used  as  denoting  only  precious  metals,  coined  by 
the  state,  and  the  fiduciary  or  fiat  issues,  whether  of  the  state  or  its 
creatures,  which  are  established  as  the  legal  tender  in  payment  of 
liquidated  debts. 


388          The  Canadian  Banking  System,  1817-1890 

measures  for  the  protection  of  note  holders  are  more 
obvious  and  of  easier  application;  and  that  deposi 
tors,  as  a  rule,  are  better  informed,  can  more  easily 
protect  themselves,  and  so  have  less  claim  on  the 
guardianship  of  the  legislature.1  I  apprehend,  how 
ever,  that  the  real  reason  lies  deeper.  Of  all  the 
substitutes  for  money,  bank  notes  are  the  nearest  like 
money.  They  are  transferred  by  delivery  merely, 
they  pass  from  hand  to  hand  without  indorsement; 
they  are  issued  in  convenient  and  even  denomina 
tions,  and  they  are  legal  tender  if  not  objected  to  as 
not  money.  Where  the  greater  part  of  the  circula 
ting  medium  used  in  the  small  exchanges  is  com 
posed  of  bank  notes,  many  creditors  have  practically 
no  option  whether  or  not  to  accept  in  payment  these 
conventional  substitutes  for  money.  A  retail  trader, 
e.  g.,  is  forced  to  receive  the  notes  by  custom,  and 
the  probability  of  having  to  wait  for  satisfaction  if 
he  does  not  take  it  when  and  how  it  may  be  offered. 
It  may  be  objected  that  the  smallest  shop-keeper  or 
humblest  laborer  has  the  right  to  refuse  paper  which 
will  not  be  redeemed  at  its  face  value.  With  regard 
to  the  notes  of  a  particular  bank,  the  objection  holds. 
But  on  the  one  occasion  when  a  general  suspension 
of  specie  payments  was  permitted  Canadian  banks, 
inconvertible  notes  were  taken  by  traders  at  the  same 
value  as  paper  paid  in  specie.  In  the  great  majority 
of  cases  the  bearer  of  a  bank  note  holds  a  debt, 
which,  though  not  of  his  own  seeking,  it  was  con 
ventionally  necessary  to  accept.  Apart  from  the 
precepts  of  economic  policy,  justice  to  the  note  holder 
as  a  quasi-involuntary  creditor,  must  always  be  a 

^unbar,  ut  supra,  p.  58. 


The  Canadian  System  of  Note  Issue  3S9 

valid    and    effective    reason    for    special    legislative 
action  to  make  his  claim  secure. 

The  quality  of  security  is  necessarily  associated 
with  that  of  convertibility.  If  it  were  impossible  to 
change  the  note  for  the  money  promised  on  its  face, 
the  creditor's  claim  would  not  be  secured.  But  secu 
rity  and  convertibility,  as  the  people  of  the  United 
States  ought  to  have  learned  in  the  last  fourteen 
years,  are  not  the  only  desiderata  in  a  circulating 
medium  so  like  money  and  used  in  substitution  for 
it.  It  is  an  accepted  doctrine  of  monetary  theory 
that  the  amount  of  metallic  money  in  a  country  is  so 
regulated  by  the  action  of  the  international  ex 
changes,  that  it  tends  constantly  to  the  point  where 
its  effect  upon  prices  will  not  disturb  the  balance  of 
trade,  or  as  it'  has  been  called,  the  equilibrium  of 
international  payments.1  If  a  metallic  currency  is  to 
be  partly  replaced  by  a  quantity  of  bank  notes,  the 
substitute,  to  be  perfect,  ought  to  be  as  elastic,  at 
least,  as  that  part  of  the  circulating  medium  instead 
of  which  it  is  used.  If,  further,  the  volume  of  the 
bank  note  circulation  is  so  elastic  that  it  easily  and 
automatically  corresponds  not  only  to  what  the  trade 
of  the  country  ought  to  have  in  the  long  run,  but 
also  to  the  frequent  rhythmic  rise  and  fall,  which  is 
especially  marked  in  the  commercial  activity  of  com 
munities  largely  agricultural,  the  advantage  of  the 
substitution  is  greatly  enhanced.  By  means  of  bank 
notes,  there  is  attained  a  more  exact  adjustment  of 
the  currency  to  the  need  for  currency  than  was  pos 
sible  when  the  medium  used  in  the  exchanges  effected 
by  bank  notes  was  wholly  metallic. 

]J.  E.  Cairnes,  "Some  Leading  Principles  of  Political  Economy 
newly  Expounded,"  part  iii,  chapter  iii,  sec.  5. 


390          The  Canadian  Banking  System,  1817-1890 

The  need  that  the  bank  note  currency  should  be. 
secure,  convertible,  and  elastic  in  this  second  sense, 
is  so  nearly  a  generally  accepted  doctrine  as  to  pre 
clude  the  demonstration  here.  Besides,  the  proof  can 
be  found  in  almost  any  received  work  on  banking 
theory.  But  the  methods  by  which  these  desiderata 
are  obtained  in  Canada  present  some  unique  devices 
and  deserve  examination. 

First,  then,  as  to  ultimate  security.  Subject  to  the 
exceptions  already  noted,  and  the  provisions  that  no 
bank  may  issue  notes  promising  the  payment  of  sums 
of  money  less  than  five  dollars,  or  not  multiples  of 
five  dollars,  the  Canadian  bank  note  issue  is  free  and 
plural.  Though  altogether  arbitrary,  the  maximum 
limit  is,  in  effect,  a  restriction  upon  individual  banks 
rather  than  on  the  currency  as  a  whole.  The  total 
authorized  circulation  on  the  30th  June,  1894,  was 
$61,559,473,  the  amount  outstanding  $30,241,719. * 
The  bank  note  circulation  has  never  exceeded  $40,- 
000,000.  Not  more,  probably,  than  four  of  the  banks 
with  a  moderate  paid-up  capital  and  a  relatively  large 
and  active  business,  find  their  authorized  circulation 
inadequate  in  the  most  active  season  of  the  year. 

The  security  for  the  ultimate  payment  of  this  lia 
bility  is  the  prior  lien  given  to  the  holders  of  its 
notes,  upon  all  the  assets  of  any  insolvent  bank. 
The  notes  were  first  made  a  preferred  claim  in  1880. 
Since  then  there  have  been  four  bank  failures,  and 
in  every  case  all  the  notes  presented  have  been  paid 
in  full.  It  will  hardly  be  possible  in  the  future  for 

xThe  figures  are  obtained  by  deducting  from  the  grand  total 
given  in  the  statements  of  banks  acting  under  charter,  the  author 
ized  and  outstanding  circulation  of  the  defunct  Commercial  Bank 
of  Manitoba. 


TJie  Canadian  System  of  Note  Issue  391 

any  bank  to  play  the  losing  game  so  long  that,  when 
it  is  forced  to  withdraw,  its  property  will  not  be 
enough  to  discharge  its  liabilities  on  notes.  On  the 
1st  January,  1894,  the  Canadian  banks  held  assets, 
presumably  good,  averaging  §8.809  for  every  dollar 
of  their  notes  in  circulation.  Of  individual  banks, 
there  was  only  one  whose  assets  bore  as  low  a  pro 
portion  as  S3. 56  to  $1  of  notes;  only  two  others  who 
held  less  than  $6  against  every  note  issued.1  One  bank 
shows  as  high  a  proportion  as  $10.91  of  assets  per 
dollar  of  notes,  another  $11.03,  and  another  still 
812.40.  But  this  is  not  the  only  guarantee.  The 
notes  are  a  first  charge,  not  only  upon  the  $302,991,- 
544  of  assets,  but  also  upon  the  double  liability  and 
unpaid  stock  subscriptions  of  shareholders  to  the 
amount  of  $63,313,315  more.  The  average  guarantee 
behind  each  dollar  of  the  circulation  is,  therefore, 
nothing  less  than  the  extraordinary  sum  of  810.65. 
For  the  Bank  of  Montreal,  the  proportion  rises  to 
813.29,  for  the  Dominion  Bank  to  814.40,  and  for  the 
Quebec  Bank  to  $15.42.  The  average,  however,  is 
one  of  the  few  that  are  really  representative.  By 
the  Bank  Circulation  Redemption  Fund,  the  note 
issue  of  any  bank  is  become  a  debt  which  all  the 
banks  may  be  called  on  to  redeem,  an  amount  equal 
to  five  per  cent,  of  the  circulation  being  immediately 
available  after  a  failure,  and  one  per  cent,  in  each 
subsequent  year. 

Suspension  of  the  payment  of  any  of  its  liabilities, 
as  they  accrue,  if  continued  for  ninety  days,  consec 
utively  or  during  the  year,  constitutes  a  bank  insol 
vent,  and  forfeits  its  charter,  except  for  the  purpose 

1  These  banks  have  issued  about  $40,000,  $1,050,000  an.l  $120,000, 
respectively. 


392          The  Canadian  Banking  System,  1817-1890 

of  collecting  its  debts  and  winding  up  the  estate. 
Practically  though,  a  bank  fails  on  the  day  it  stops 
payment.  Its  notes  bear  interest  at  six  per  cent,  per 
annum  from  the  day  of  suspension  to  the  day  of  pay 
ment.  In  all  probability,  those  in  charge  of  a  sus 
pended  bank's  estate  will  be  able  to  begin  redemption 
within  sixty  days  of  the  failure.  The  interest  which 
the  notes  bear  until  redemption  has  begun  rather 
tends  to  hasten  the  efforts  of  liquidators.  But  if  they 
do  not  make  arrangements  for  paying  these  claims, 
and  do  not  publicly  announce  within  the  sixty  days 
that  such  arrangements  have  been  made,  the  Minister 
of  Finance  may  make  arrangements  for  the  payment 
of  the  notes,  with  interest,  out  of  the  Bank  Circula 
tion  Redemption  Fund.  Interest  in  this  case  also 
ceases  after  the  day  set  for  redemption. 

This  fund,  as  we  have  seen,  has  been  deposited 
with  the  government  for  the  very  purpose  of  ensuring 
prompt  redemption  of  the  notes  of  an  insolvent  bank. 
It  has  been  contributed  by  all  the  banks  in  sums  equal 
to  five  per  cent,  of"  the  average  circulation  of  each 
during  the  twelve  months  preceding  the  15th  July, 
1892.  It  is  annually  adjusted,  and  bears  interest  at 
3  per  cent.  If  it  be  depleted  by  operations  of  re 
demption,  each  of  the  solvent  banks  must  contrib 
ute  to  make  it  good,  by  annual  payments  not  exceed 
ing  one  per  cent,  of  its  average  circulation.  "With 
respect  to  notes  paid  out  of  the  fund,  the  Minister  of 
Finance  has  the  same  prior  lien  upon  the  assets  of 
the  issuing  bank  as  any  other  note  holder,  and  if 
such  notes  or  any  number  of  them  are  redeemed,  he 
is  under  obligation  to  return  the  proceeds,  pro  raid 
to  the  amount  of  their  contributions,  to  the  banks 
who  helped  restore  the  fund  to  its  permanent  level, 


The  Canadian  System  of  Note  Issue  393 

i.  e.,  five  per  cent,  of  the  total  bank  note  circulation. 
The  liability  of  the  government  is  limited  to  the 
amount  of  the  fund.  Neither  in  the  matter  of  ulti 
mate  security,  nor  of  redemption  in  case  of  insol 
vency,  does  the  Canadian  state  become  responsible 
for  the  notes.  The  holder  must  look  to  the  pledge 
of  the  banks  first,  last,  and  for  all  time,  as  the  only 
guarantee  o'f  the  credit  currency.  Experience  proves 
that  the  first  lien  is  ample  ultimate  security  for  the 
notes.  By  agreeing  to  maintain  the  Redemption 
Fund,  the  banks  have  bound  themselves  so  long  as 
they  are  solvent,  to  see  to  the  payment  of  the  notes 
of  any  bank  of  the  system  that  may  suspend.1 

So  far  as*  the  circulation   is   concerned,  the   Bank 

Act   of  1890  does  for  the    banks    what    the    British 

/ 

Suppose,  however,  that  one  very  bad  failure  should  exhaust  the 
fund,  and  that  another  bank,  quite  able  to  pay  its  debts  and  even 
return  a  dividend  to  proprietors,  should  fail  or  decide  to  wind  up 
its  business  before  the  assessment  to  make  the  fund  good  had  been 
levied  by  the  Treasury  Board,  would  the  second  bank  be  liable  to 
contribute?  The  case  is  nowhere  treated  in  the  Bank  Act;  the  con 
tribution  would  not  be  one  of  the  penalties  which  are  a  last  charge 
on  the  assets  of  an  insolvent  bank,  and  section  54  provides  only  for 
repayment  from  the  fund  to  the  bank  in  liquidation,  not  from  a 
bank  in  liquidation  to  the  fund.  It  is  conceded  that  this  hypothesis 
is  a  bit  extreme.  Suppose,  again,  a  general  financial  and  commer 
cial  crash,  in  which  several  banks  should  go  do  wn;  what  then  would 
become  of  the  fund?  Three  of  the  banks  have  each  a  circulation 
equal  to  twice  or  thrice  the  amount  of  the  fund,  while  the  notes 
of  any  two  of  twelve  others,  if  falling  upon  the  fund  for  payment, 
would  wholly  deplete  it.  What  would  happen  in  case  of  the  third 
failure  ?  If,  of  course,  such  a  catastrophe  were  probable,  the  criti 
cism  would  be  good.  Laws  must  be  passed  with  a  view  to  what  is 
likely  to  happen,  and  not  to  meet  everything  imaginable.  The  very 
banks  whose  failures  are  supposed  to  deplete  the  fund  are  among 
those  notoriously  well  managed,  stable  and  strong.  In  the  worst 
failure  that  ever  happened  in  Canada  the  assets  of  the  bank,  if 
notes  had  been  a  preferred  claim,  would  have  been  enough  and 
more  to  pay  them  in  full. 


394  The  Canadian  Banking  System,  1817-1890 

North    America   Act   of  1867    accomplished   for   the 
Canadian  provinces.     In  either  case  confederation  is 
now  an  accomplished  fact.     But  the  highest  benefits 
of  the  bank  federation  are  indirect.     The  Bank  Cir 
culation  Redemption  Fund  is  the  latest,  the  strongest, 
the  outermost  safeguard  set  up  about  the  circulating 
medium  of  Canada.     The   service  of  the   fund  as  a 
preventive,  practically  absolute,  of   discount  on  the 
notes  of    a    suspended    bank,    provides  the    best    of 
reasons  for  undisturbed  confidence  in  bank  paper. 
Formerly  it  was  necessary  to  keep  telling  the  Cana 
dian  public  that  the  currency  was  good.     Now  they 
are  convinced.     The  fund  protects   the   note-holder 
from  loss,  however  ignorant  he  may  be,  'or  however 
humble   or  helpless   his    condition.     It   protects  the 
banks  against  needless  runs  from  this  class  of  credi 
tors,  and  materially  strengthens  their  credit.     It  is 
to  be  admitted  that  the  new  security  for  the  circula 
tion  somewhat  strengthens  that  tendency  of  deposi 
tors  to  convert  their  claims  against  a  suspected  bank 
into  a  prior  lien  upon  its  assets,  which  is  illustrated 
by  the  increase   of  circulation   and  the  decrease  in 
demand  deposits  shown  below  in  statements  of  the 
Commercial  Bank's  condition.1     But  the  impulse  to 

1PThe  chief  use  of  the  fund  appeared  after  the  failure  of  the  Com 
mercial  Bank  of  Manitoba  on  Monday,  the  3d  July,  1893.  Induced 
by  the  interest  and  protected  by  the  guarantee  fund,  the  banks  in 
Winnipeg  and  throughout  Manitoba  "accepted  the  notes  after  sus 
pension  freely,  relieving  the  public  from  all  inconvenience  and  fear. ' ' 
The  notes  never  fell  to  a  discount,  and  on  the  16th  September  those 
held  by  the  public  were  redeemed.  The  liquidator,  finding  he 
could  better  realize  upon  the  estate  by  waiting  a  little,  made  ar 
rangements  to  continue  paying  interest  upon  notes  held  by  the 
banks  until  he  should  have  the  funds  to  redeem  them.  Thus,  at 
the  end  of  September,  the  circulation,  which  had  been  $419,135  on 
the  3d  July  was  $163,225;  a  month  later  $83,365;  and  on  the  last 


The  Canadian  System  of  Note  Issue  395 

change  deposits  into  notes  is  only  slightly  stronger 
than  when,  before  the  establishment  of  the  fund,  the 
notes  were  already  the  first  charge  against  a  failed 
bank's  assets.  The  plan  of  meeting  a  heavy  run  by 
paying  out  notes  is  practicable  only  so  long  as  the 
circulation  is  within  the  authorized  limit  and  does 
not  come  back  for  redemption.  All  the  banks,  ex 
cept  the  five  or  six  with  largest  capitals,  have  a  very 
small  margin  between  outstanding  and  authorized 
circulation;  at  best,  therefore,  a  weak  bank  in  serious 
difficulty  could  not  pursue  the  policy  for  more  than 
forty-eight  or  seventy-two  hours.  In  the  first  place 
it  would  too  soon  exhaust  its  authority  to  issue  notes, 
and  further  emission  would  subject  its  estate  to  heavy 
fines.  Then  persons  who  had  once  acquired  the 

day  of  November  $31,835,  from  which  point  it  has  fallen  to  $12,440, 
in  June,  1894. 

The  Commercial  Bank  of  Manitoba  was  the  third  of  the  banks 
started  in  the  eighties  to  close  its  doors.  In  1884  it  had  succeeded, 
as  an  incorporated  bank,  to  the  business  of  Macarthur,  Boyle  & 
Campbell,  private  bankers  and  financial  agents  at  Winnipeg. 
Always  extremely  subject  to  local  influences,  usually,  from  all  ap 
pearances,  run  with  as  much  of  a  view  to  the  development  of  the 
country  as  to  the  conduct  of  a  safe  and  sound  banking  business, 
and  resorting  to  such  methods  to  obtain  business  as  prudent  bank 
ers  disapproved,  the  Commercial  met  a  fate  by  others,  at  least,  not 
unexpected.  It  had  been  indebted  to  its  Montreal  correspondent, 
on  secured  loans,  since  31st  January,  1892.  Beginning  at  the  mod 
est  figure  of  $25,000,  the  debt  rose  by  the  next  January  to  $125,000, 
and  by  March  to  $100,290.  During  this  period  settlements  with  the 
Commercial  were  difficult,  and  some  banks  in  Winnipeg  had  regu 
larly  required  the  payment  of  balances  in  legal  tenders,  or,  if 
accepting  the  bank's  draft  on  Montreal,  fore-assured  themselves  of 
its  acceptance.  The  winter  of  1892-3  was  a  hard  one  for  the  con 
cern,  and  the  spring  quite  as  severe.  In  May  a  drain  of  its  depos 
its  payable  on  demand  was  begun.  It  continued  in  June,  with  force 
much  increased  towards  the  end  of  the  month.  The  greater  partof 
the  run  was  met  by  paying  out  notes.  Thus,  on  the  1st  July  $38,752 
of  deposits  were  called  for,  and  $22,245  of  notes  paid  out.  Between 


396  The  Canadian  Banking  System,  1817-1890 


depositing  habit  would  not  keep  notes  thus  received 
in  their  pockets  or  their  safes.  They  would  pay 
them  in  to  other  banks,  and  the  demands  for  redemp 
tion  pressed  by  these  creditors  would  precipitate  the 
failure  of  the  suspected  bank.  The  Commercial 

the  31st  May  and  the  3d  July  demand  deposits  were  reduced  $189,813, 
circulation  increased  by  $140,605.  The  principal  provision  for  the 
other  $49,000  drawn  out  is  best  explained  by  the  increase  of  $42,000 
in  secured  loans  from  other  banks.  The  process  of  paying  out 
notes  to  anxious  depositors  had  to  stop,  of  course,  as  soon  as  the 
paper  fell  into  the  hands  of  other  banks.  The  Commercial  having 
only  $4,130  of  money  left  in  its  vaults,  could  not  redeem  its  paper 
and  was  forced  to  suspend.  The  following  table  shows  the  state  of 
the  bank  at  different  times  preceding  the  failure,  and  the  effect  of 
a  year's  liquidation: 

CONDENSED  STATEMENT  of  the  Assets  and   Liabilities  of  the  Com 
mercial  Bank  of  Manitoba. 


LIABILITIES 

(cents  omitted) 

31  May,  1893 

30  June 

3  July 

30  June,  1894 

Notes  in  circulation 

$ 
278,530 
85,117 

685,695 
148,357 

160,000 
1,709 

$ 
396,890 
69,646 

534,634 
167,176 

172,583 
320 

$ 
419,185 
84,294 

495,882 
137,176 

202,583 
5,197 

$ 
12,440 

Due  Provincial  Gov't  
Deposits  payable    on    de- 

557,393 
22,920 

Deposits  payable  after  no- 

Loans  from    other   banks 
in  Canada,  secured  
Other  liabilities 

3,042 

Total 

1,360,470 

23,273 

19,750 
27,915 

48,449 
1,714,192 
68,005 
31  ,828 

12,398 
10,150 
10,741 

1,341,251 

4,130 
19,750 
72,997 

26,480 
1,649,059 
104,702 
41,158 

12,122 
10,150 
10,599 

1,344,269 

4,130 
19,750 
85,795 

26,308 
1,636,260 
104,702 
41,158 

12,122 
10,150 
13,789 

595,796 

ASSETS 
Specie  and  Dominion  notes 
Deposit  for  note  circulation 
Deposit  in  other  banks  — 
Notes,    cheques   and    bal 
ances  due  of  other  banks 

14,750 
81,045 

4,484 
536,790 
465,536 
32,501 

14,221 
11,832 
10,063 

Overdue  debts 

Real  estate 

Mortgages  on   real   estate 
held                       

Bank  premises      

Other  assets  

Total 

1,967,708 

1,951,151 

1,954,167 

1,171,225 

The  Canadian  System  of  Note  Issue  397 

Bank  of  Manitoba  withstood   the  extreme  pressure 
but  one  day. 

The  metallic  materials  of  redemption — the  money 
in  which  bank  notes  are  payable — are  American  gold 
coins  of  the  present  weight  and  fineness,  the  eagle 
being  legal  tender  for  $10  in  Canadian  currency,  and 
the  British  sovereign   and   a  half  thereof,   the  unit 
being  legal  tender  for  $4.86f   in   Canadian  currency. 
Silver  coins  of  5,  10,   25   and  50   cents   in  Canadian 
currency,  struck  by  the  British  mint,  are  legal  tender 
up  to  $10;  copper  or  bronze  cents  to   25  cents.     The 
Dominion  also  issues  a  legal  tender  paper  currency, 
redeemable  in  gold,  in  denominations  of  1,  2,  4,  5,  10 
and  20  dollars  and  upwards.    These,  with  bank  notes, 
constitute   practically   the     whole    currency   of   the 
country,  except  that  which  is  used  in  making  frac 
tional  change.     The  larger  part  of  the  Dominion  note 
circulation  among  the  people  consists  of  one,  two  and 
four  dollar  notes,  payable  on  demand  by  the  Assist 
ants   Receiver  General  at  the  commercial  center  of 
any  province;  the  balance  of  the   circulation,   from 
50  to  70  per  cent.,  is  held  by  the  banks.     Upon  the 
request  of  the  payee,  a  bank  is  required  in  making  a 
payment,  to  pay  not  to  exceed  $100  of  the  amount 
thereof  in  Dominion  notes  of  the  smaller  denomina 
tions.     The  chief  variations  in  the  amount  of  Domin 
ion  notes  outstanding  are  due  to  the  rise  and  fall  of 
the  large  note  circulation,  and  are  dependent  upon 
variations  in  the  reserves  held  by  the  banks.     The 
legal  reserve  against  the   government  issues  not  in 
excess  of  $20,000,000  is  composed  of  (a)  specie  and 
Dominion  debentures  guaranteed  by  the  government 
of  the  United  Kingdom  to  an  amount  equal  to  25  per 
cent,  of  the  total  circulation,  of  which  15  per  cent. 


398  The  Canadian  Banking  System,  1817-1890 

at  least  shall  be  in  specie;  (b)  Dominion  debentures, 
issued  by  authority  of  Parliament,  to  cover.  Issues  in 
excess  of  $20,000,000  are  covered  by  equal  amounts 
of  specie.  In  practice,  considerably  more  specie  and 
guaranteed  debentures  are  held  than  the  law  requires; 
the  practice  now  conforms  to  the  original  policy  of 
Sir  Francis  Hincks,  i.  e.,  to  establish,  after  experience, 
a  minimum  to  be  covered  by  securities,  and  to  hold  for 
all  issues  in  excess  of  the  minimum  equal  amounts 
of  specie.  If  the  unguaranteed  debentures  were 
sold  to  provide  specie  for  redemption  purposes,  they 
would  become  liabilities  quite  as  much  as  the  notes 
themselves.  The  one  difference  now  is  that  the 
notes  have  been  issued  to  the  public;  the  debentures 
may  be  issued.  The  supposition  that  the  one 
"secures"  the  other  form  of  liability  is  palpably 
absurd.  The  requirement  that  such  debentures  shall 
be  held  in  amounts  equal  to  the  outstanding  circula 
tion  not  otherwise  covered,  originated,  no  doubt,  in 
the  idea  that  the  government  would  thereby  be  pre 
vented  from  incurring  debt  on  Dominion  notes  with 
out  the  authority  of  Parliament.  The  only  real 
reserve  held  against  the  notes  consists  of  specie  and 
guaranteed  debentures.  This  need  be  but  25  per 
cent.,  but  ought  to  be  much  more.  Latterly  it  has 
been  higher,  in  June,  July  and  August,  1894,  the 
specie  alone  reaching  nearly  50  per  cent. 

There  is  high  authority  for  the  rule  that  the  lowest 
denomination  of  bank  notes  should  not  be  less  than 
five  dollars.  If  a  small  note  circulation  is  necessary, 
or  is  preferable  to  a  metallic  currency,  it  is  expedient, 
probably,  that  the  government  should  be  responsible 
for  it.  Yet  the  small  note  circulation  of  Canada  is 
of  comparatively  minor  consequence.  The  amount  of 


The  Canadian  System  of  Note  Issue  399 

Dominion  notes  in  the  hands  of  the  people,  i.  e,,  out 
side  the  banks,  has  never  been  more  than  §8,000,000; 
$6,000,000  is  nearer  the  usual  figure.  The  total  cir 
culation  outstanding  is  much  larger,  and  now  amounts 
to  more  than  $20,000,000.  Why  ?  The  obvious  expla 
nation  is: — By  compelling  them  to  hold  not  less  than 
forty  per  cent,  of  their  cash  reserves  in  Dominion 
notes,  the  government  has  forced  from  the  banks  a 
permanent  loan  without  interest  which  has  varied  in 
the  last  five  years  between  ten  and  fourteen  million 
dollars.  Yet  the  credit  of  Canada  is  good;  its  secu 
rities,  though  bearing  extremely  low  rates  of  interest, 
are  highly  esteemed  by  British  investors.  "  Its  gov 
ernment  can  borrow  all  that  it  needs  in  the  open 
market.  The  justice  of  a  forced  loan  for  16  to  22  per 
cent,  of  the  entire  banking  capital  of  the  Dominion, 
need  not  be  examined. 

It  is  enough  that  the  reserve  provision  is  injurious. 
It  prevents  the  use  of  gold,  or  gold  certificates,  in 
exchanges  between  the  banks  at  the  centers.  In  a 
single  day  a  bank  might  acquire,  by  collecting  its 
just  debts,  so  great  a  sum  of  specie  that  its  total 
stock  would  rise  above  the  proportion  fixed  by  law, 
and  sanctioned  by  a  penalty  of  §500  for  each  violation. 
It  diminishes  the  amount  of  gold  held  in  the  country. 
It  impairs  the  ultimate  banking  reserve  of  the 
Dominion.  That  reserve  is  not  at  all  times  instantly 
available  in  its  nominal  strength,  as  it  would  be  were 
the  banks  perfectly  free.  The  cash  which  they  hold 
consists,  in  part,  of  mere  promises,  and  they  are  under 
constant  obligations  as  to  the  proportions  which  such 
promises  shall  bear  to  the  entire  amount.  If  the 
banks  had  only  Canadian  payments  to  make,  the 


400          The  Canadian  Banking  System,  1817-1890 

objections  to  the  requirement  would  be  less  serious. 
In  Canada  Dominion  notes  are  money. 

But  the  liabilities  of  the  Canadian  banks  are  by 
no  means  merely  Canadian.  They  are  due  in  the 
United  States,  in  the  United  Kingdom,  Hong  Kong, 
Australia.  The  really  heavy  demands  upon  Cana 
dian  banks  have  always  been  for  settlement  of  bal 
ances  abroad.  To  meet  them  they  need  the  inter 
national  money,  and  that  is  gold  alone;  for  inter 
national  payments  Dominion  notes  are  just  about  as 
available  as  American  silver  certificates.  It  is  true 
that  there  are  redemption  offices  at  Toronto,  Mon 
treal,  Halifax  and  St.  John,  but  when  called  upon  to 
redeem  quantities  of  their  notes,  past  Governments, 
if  specie  was  wanted  for  shipment  to  New  York, 
have  repeatedly  paid  out  sovereigns;  if  it  was  needed 
for  export  to  England,  they  have  redeemed  in  eagles, 
and  the  coins  desired  have  consequently  cost  a  pre 
mium  of  one-eighth  to  one-quarter  of  one  per  cent. 
And  in  order  to  "  protect  the  reserve,"  or  "correct 
the  situation,"  it  is  quite  possible  that  authorities, 
within  the  next  ten  years,  may  again  exercise  this 
option  to  the  cost  and  hurt  of  the  honest  commerce 
of  the  country. 

The  immediate  redemption,  the  convertibility  of 
Canadian  bank  notes,  is  ensured  by  their  character 
as  debts  due  on  demand,  for  the  payment  of  which 
the  entire  estate  of  the  issuer  is  liable.  The  note 
must  be  paid  when  presented  at  the  place  of  payment, 
else  the  bank  whose  promise  it  bears  confesses  insol 
vency  and  destroys  its  credit.  A  daily  test  of  this 
convertibility  is  made  wherever  there  are  two  or 
more  offices  of  different  banks.  Bank  notes  are 
legally  payable  only  at  the  offices  where  they  are 


The  Canadian  System  of  Note  Issue  401 

made  payable,  and  at  the  redemption  office  which  the 
Bank  Act  obliges  each  bank  to  establish  at  the  trade 
center  of  each  province.  That  office  may  be  a  branch 
of  the  issuing  bank,  or  an  office  of  another  bank 
which  undertakes  the  service.  The  notes,  however, 
must  be  received  in  payment  at  any  office  of  the  bank 
which  issues  them,  and  banks,  in  practice,  do  receive 
the  notes  of  other  banks.  The  balances  due  after 
the  daily  exchange  of  notes  and  other  liabilities  made 
between  bank  offices  outside  of  the  three  principal 
cities,  are  settled  by  drafts  on  Montreal,  Toronto  and 
Halifax.  In  these  three  cities  there  are  clearing 
houses,  and  the  balances  remaining  after  the  daily 
offset  of  claims  due  by  the  banks  against  claims  due 
to  them,  are  settled  in  legal  tenders  of  the  highest 
possible  denomination.  In  consequence,  the  country 
through,  there  are  frequent  and  thorough  tests  of  the 
possibility  to  convert  bank  notes  into  the  money 
promised  by  them.  The  public  take  little  active  part 
in  this;  the  banks  do  the  work  by  presenting  for  pay 
ment  whatever  notes  they  receive  in  the  course  of 
their  day's  business.  Of  these,  the  notes  of  local 
competitors  will  stand  for  the  largest  sums;  notes  of 
banks  without  a  branch  in  the  locality  are  forwarded 
to  the  nearest  redemption  office  and  presented  there. 
The  possibility  and  enforcement  of  the  immediate 
redemption  of  bank  notes  have  an  important  bearing 
upon  the  elasticity  of  this  form  of  circulating  me 
dium.  I  have  already  taken  for  granted  the  desira 
bility  of  elasticity,  and  I  waive  now  the  discussion 
whether  as  high  a  degree  of  elasticity  can  be  secured 
through  the  emission  of  fiduciary  paper  by  other 
agencies  as  when  it  is  issued  by  banks.  Canadian 
governments  and  bankers  have  thought  not;  Ameri- 
26 


402  The  Canadian  Banking  tiystem,  1817-1890 

can  bankers,  at  their  last  convention,  have  come  to 
the  same  conclusion;  and  the  views  of  all  accord 
with  the  conclusions  of  what  may  safely  be  called 
the  received  theory  of  credit.  But  I  shall  endeavor 
to  show  that  the  Canadian  banks  do  provide  a  medium 
of  exchange,  the  volume  of  which  exactly  corre 
sponds  to  the  need  for  it — the  need  depending  upon 
the  number  and  amount  of  the  transactions  in  which 
it  is  used — and  that  with  profit  and  honor,  the  banks 
cannot  do  otherwise  under  the  present  system. 

First  let  us  look  at  the  logic  of  the  case.  The  funds 
at  the  command  of  a  bank,  its  lending  power,  or  its 
purchasing  power  as  a  buyer  of  negotiable  securities, 
are  based  on  the  capital  furnished  by  proprietors,  the 
money  deposited  with  it  by  customers,  and  such 
rights  to  demand  money  as  will  be  accepted  from 
the  banks  in  lieu  of  money  itself.  Whatever  expands 
the  credit  of  the  bank,  i.  e.,  the  extent  to  which 
rights  to  demand  money  from  it  will  be  accepted, 
permits  the  increase  of  its  profit.  Whether  this  be 
done  by  giving  the  person  to  whom  money  is  due  a 
credit  in  its  books,  or  by  paying  him  in  notes,  is,  in 
some  respects,  a  matter  of  indifference.  Every  book 
credit  accepted  in  lieu  of  money  payment,  every  note 
in  circulation,  by  augmenting  the  purchasing  power 
of  a  bank,  becomes  tantamount  to  a  loan,  in  the  latter 
case  always  without  interest,  had  by  the  bank  from 
the  public.  This  need  nowise  imply  that  the  issuers 
of  notes  do  not  share  their  gain  with  the  people,  and 
it  does  not  imply  that  banks  alone  reap  the  advantage 
of  economizing  the  $30,000,000  or  more  of  real  cap 
ital  which,  without  some  other  substitute,  would  be 
needed  to  effect  the  Canadian  exchanges  in  which 
bank  notes  are  now  used.  But  it  does  make  it  plain 


The  Canadian  System  of  Note  Issue  403 

that  each  bank  has  a  direct  and  powerful  motive  for 
expanding  its  note  circulation  by  whatever  lawful 
and  reputable  methods  it  may. 

A  little  examination  ought  to  make  it  equally  clear 
that  the  possibility  of  this  expansion  is  dependent 
upon  the  needs  of  bank  customers.     Canadian  banks 
are  prohibited   by  law  from  pledging,  assigning  or 
hypothecating  their  notes,  and  advances  or  loans  made 
on  the  security  of  its  notes  are  not  recoverable  from 
a  bank.     The  only  way  for  a  bank  to  get  its  notes  in 
circulation  is   to  pay  them  over   its  counter  in  the 
ordinary  course  of  business.     It  may  exchange  them 
for  gold,  pay  with  them  the  demands  of  depositors, 
or  other  creditors,  or  make  advances  in  that  form  of 
its  credit.     Where  the  practice  of  keeping  deposits 
with  banks  is  common,  and  especially  where  interest 
is  paid  on  deposits,  the  bank's  customers  are  prevented 
by  motives  of  prudence  or  profit  from  drawing  out 
more  notes  than  are  required  for   their  immediate 
purposes.     No  man  will  procure  twice  the  amount  of 
notes  he  needs  to  meet  his  payments,   and   run  the 
risk  of  losing  the  unused  half,  when,  by  calculating 
his  wants,  he  would  avoid  the  risk  and  either  save 
interest  on  the  unnecessary  part  of  a  loan,  or,  in  some 
cases,  receive  interest  on  the  balance  he  leaves  with 
his    bank.      Where,    further,    the   banking  habit    is 
strong  and  banking  facilities  are  as  well  distributed 
as  they  are  in  Canada,  the  customers  of  banks  and 
those    in  exchange    relations    with    them,    comprise 
practically  the  entire  commercial,  agricultural  and 
industrial    community.       The  means,    for   instance, 
which  three  or  four  hundred  laborers  need  for  their 
weekly  or  monthly  purchase  of  groceries,  and  other 
goods,  are  provided  at  one  stroke  in  supplying  a  man- 


404          The  Canadian  Banking  System,  1817-1890 

ufacturer  or  contractor  with  notes  for  his  pay  roll. 
The  bills  which  the  farmers  of  a  certain  district  use 
to  buy  their  winter  supplies,  or  in  which  they  realize 
upon  their  grain,  are  issued  through  a  few  advances 
to  the  produce  shippers  operating  in  that  district. 
Since  the  process  is  quite  the  same  in  an  indefinite 
number  of  other  cases,  the  whole  country  secures 
whatever  expansion  of  the  circulation  may  be  required. 
The  banks  clearly  have  every  motive  to  meet  the 
need  for  increased  note  issues;  it  is  quite  as  clear 
they  cannot  issue  in  excess  of  that  need. 

In  no  country,  however,  are  the  number  and 
amount  of  the  exchanges  effected  by  bank  notes  in 
constant  augmentation.  The  upward  movement,  if 
there  be  one,  is  not  steady.  The  need  for  circulating 
medium  at  a  given  time  may  be  greater  than  it  was 
shortly  before,  exactly  the  same,  or  less.  Particu 
larly  in  North  America,  where  the  supply  of  import 
ant  marketable  commodities  varies  with  the  seasons 
of  the  year,  are  there  marked  differences  between 
the  commercial  activity  in  different  months,  and 
extreme  variations  in  the  need  for  the  means  of  pay 
ment.  Contraction  is  an  element  as  important  to 
elasticity  as  expansion.  In  Canada,  while  the  in 
fluence  of  foreign  exchanges  and  international  trade 
is  not  without  force,  the  immediate  causes  of  con 
traction  are  different,  but  quite  as  effective  and  auto 
matic,  and  even  more  prompt.  No  man  who  keeps  a 
bank  account  is  going  to  hold  bank  notes  or  any 
other  negotiable  instruments  of  credit  payable  on 
demand  after  the  need  for  their  use  in  exchange  is 
passed.  Either  he  wishes  to  avoid  the  risk  of  losing 
them,  desires  to  convert  them  into  interest-bearing 
deposits,  or  with  them  discharges  some  obligation  to 


The  Canadian  System  of  Note  Issue  405 

the  bank  on  which  he  is  paying  interest.  In  any 
case  he  has  substantial  motives  of  gain  for  bringing 
the  notes  to  the  bank  which  has  his  account.  The 
action  of  a  note  holder,  who  has  no  bank  account, 
may  be  disregarded;  if  a  bank  note  is  issued  in 
making  payments,  it  is  destined,  with  all  necessary 
promptness,  to  reach  the  hand  of  some  one  who  has 
a  bank  account,  and  will  deposit  the  note  to  his 
credit  if  he  feels  no  need  for  its  present  use. 

The  next  and  final  agents  in  the  process  of  con 
traction  are  the  banks  themselves.  Though  it  is  not 
legally  obliged  to  do  so,  any  Canadian  bank  will 
receive  in  payment  the  notes  of  any  other  bank  of 
the  system.  In  so  doing  the  bank  is  protected  from 
loss,  and  is  able  to  serve  not  only  the  customer's 
convenience,  but  also  its  own  advantage.  The  total 
amount  of  notes  outstanding  at  any  one  time  is 
limited,  as  we  have  just  seen,  by  the  needs  of  the 
public  for  that  form  of  circulating  medium.  If  there 
were  no  other  substitute  for  money,  the  extreme  limit 
of  the  note  circulation  during  a  given  period  would 
be  the  total  amount  of  exchanges  then  to  be  per 
formed,  divided  by  the  average  amount  of  payments 
effected  by  a  given  sum  of  bank  notes.  But  there 
are  other  substitutes  for  money  and  the  actual  limit 
is  considerably  less.  A  comparison  of  the  facts  in  dif 
ferent  countries,  e.  g.,  England,  France  and  Scotland, 
shows  that,  while  the  amount  of  the  exchanges  varies 
with  the  condition  of  trade,  in  what  exchanges  a 
community  may  use  bank  notes  depends  upon  the 
traditions,  prejudices  and  habits  (as  accommodated 
to  legislation) — the  business  custom,  in  short — pre 
vailing  within  it.  Business  custom  changes,  without 
doubt,  but  the  changes  are  so  slow  and  comparatively 


406  The  Canadian  Banking  System,  1817-1890 

slight  as  to  permit  us  to  conclude  that  for  any  one 
time  the  limit  of  a  bank  note  circulation  is  not  only 
predetermined,  but  also  practically  independent  of 
the  amount  of  other  money  substitutes  in  use. 

From  the  banker's  point  of  view,  the  note  circula 
tion  is  a  form  of  credit  through  the  enjoyment  of 
which  his  interest  bearing  investments  may  be  in 
creased.  His  .note  issue  is  the  source  of  a  profit, 
which,  at  a  given  time,  could  not  be  obtained  in  any 
other  way.  This  being  the  case  it  is  to  the  undoubted 
advantage  of  any  one  of  the  thirty-eight  banks  now 
doing  business  in  Canada  to  supply,  so  far  as  the  law 
allows  it,  the  limited  and  predetermined  demand  for 
bank  note  currency  with  its  own  issues.  Now,  the 
bank's  only  way  to  put  notes  in  circulation  is  to  pay 
them  over  its  counter.  It  receives  each  day,  how 
ever,  the  notes  of  other  banks,  paid  in  as  deposits, 
or  in  liquidation  of  other  loans.  Such  notes  are  evi 
dences  of  non-interest  bearing  debt.  The  bank  finds 
it  essential  to  convert  the  debt  either  into  cash  or 
into  some  productive  investment.  The  notes  may  be 
collected  either  by  presenting  them  for  redemption 
or  by  paying  them  out  to  the  public.  On  the  latter 
supposition  the  public  reimburses  the  bank  by  ex 
changing  for  the  notes  either  payment  or  some  other 
right  to  demand  payment. 

But  for  the  Canadian  bank  there  is  a  more  import 
ant  consideration  than  mere  repayment.  The  circu 
lating  medium  of  the  country,  so  far  as  it  consists  of 
bank  notes,  constitutes  a  volume  of  credit  for  which 
each  bank  is  competing  to  get  the  largest  possible 
share,  in  order  to  obtain  in  this  form  the  largest  pos 
sible  loan  without  interest.  The  manifest  policy  of 
the  bank,  therefore,  is  not  to  collect  the  debt  from 


The  Canadian  System  of  Note  Issue  407 

the  public,  but  to  present  the  notes  for  redemption 
by  the  bank  which  issues  them.  By  this  means,  the 
bank  can  cause  a  slight  contraction  in  the  total  note 
circulation,  and  gain  the  chance  to  use  its  own  paper 
in  meeting  demands  for  expansion.  Sheer  self-interest 
impels  each  bank  to  demand  prompt  and  daily 
redemption  of  all  the  notes  of  other  banks  that  have 
come  into  its  tills.  Unlike  some  benefactions,  the 
act  of  paying  the  notes  of  another  bank  to  the  public 
has  a  real  and  measurable  value.  When  the  amount 
of  its  own  notes  outstanding  approaches  the  author 
ized  maximum,  and  further  issue  makes  the  bank 
liable  to  a  fine,  it  has  the  option  of  paying  out  all  the 
paper  that  comes  into  it,  or  to  circulate  exclusively 
the  notes  of  some  one  bank  whose  issue  is  further 
within  the  legal  limit.  If  the  latter  course  is  adopted, 
it  receives  compensation  for  the  service  in  some  form, 
the  usual  method  now  being  for  the  bank  whose  notes 
are  circulated  to  allow  the  circulating  bank  to  delay 
the  deposit  of  funds  in  exchange,  for  a  period  of  two 
weeks  after  the  paper  was  received.  As  the  average 
"life"  of  a  note — the  time  elapsing  between  the  issue 
of  a  note  and  its  redemption — is  probably  in  the 
neighborhood  of  four  weeks,  the  profit  on  the  circula 
tion  is  thus  divided,  the  bank  which  is  obliged  to 
circulate  another's  notes  seldom  receiving  more  than 
one-half.  To  pay  out  his  competitor's  notes  in  the 
ordinary  course  of  business  is  to  act  as  a  broker  with* 
out  charge,  or  at  a  reduced  charge;  to  hold  them  is 
to  loan  to  his  competitor  without  interest.  Either 
service  is  a  form  of  altruism  in  which  the  Canadian 
banker  will  never  indulge  so  long  as  he  can  issue 
notes  of  his  own. 


408  The  Canadian  Banking  System,  1817-1890 

Thus  the  machinery  for  expansion  and  contraction 
of  the  Canadian  bank  note  currency  is  efficient,  auto 
matic  and  complete.  The  impulse  in  either  direction 
is  the  silent,  certain  force  of  self-interest.  The  banks 
gain  in  supplying  the  public's  need  for  augmented 
circulation;  the  public  gain  in  returning  unnecessary 
notes  to  the  banks;  and  whenever  such  notes  are  not 
those  of  its  own  issue,  each  bank  finds  its  profit  in 
presenting  them  for  redemption.  Every  one  of  the 
five  hundred  branch  banks  in  Canada  is  a  competi 
tive  agent  for  expansion ;  every  one,  from  like 
motives  of  gain,  is  an  active  worker  for  contraction. 
In  either  direction  the  operations  of  the  banks  are 
wholly  dependent  on  the  needs  or  action  of  the  public 
with  whom  they  are  so  closely  in  touch. 

What  may  logically  be  expected  of  the  Canadian 
system  of  issue  is  confirmed  by  examination  of  the 
facts  as  to  the  notes  of  chartered  banks  in  circulation 
at  different  dates  since  the  31st  December,  1878.  In 
Appendix  III  there  is  a  table  showing  the  exact 
amount  of  the  total  bank  note  circulation  reported  to 
the  government  on  the  last  juridical  day  of  each 
month  since  the  31st  January,  1878.  But  every  im 
mediate  purpose  of  the  table  is  served,  in  a  more 
graphic  and  comprehensive  way,  by  the  chart  oppo 
site,  showing  the  varying  heights  of  the  circulation 
on  the  last  day  of  each  month  of  the  last  fifteen  years, 
by  means  of  points  taken  on  the  vertical  axes,  and 
connected  by  lines  for  the  sake  of  clearness.  A  cas 
ual  glance  proves  perfectly  the  rhythmic  fluctuations 
of  the  circulation  in  harmony  with  the  movements 
of  Canadian  trade.  It  shows  how  the  general  level 
of  the  circulation  rises  or  falls  in  accord  with  the 
general  prosperity  and  activity  of  commerce,  how 


ffl 


4- 


JJI--- 


r 


The  Canadian  System  of  Note  Issue  409 

the  expansion  to  meet  the  needs  of  the  autumn  and 
early  winter  are  greater  in  one  year  than  another, 
how  quickly  and  regularly  the  volume  of  the  cur 
rency  is  contracted  in  January,  how  it  remains 
stationary  or  gradually  falls  still  further  in  the 
months  of  the  spring  and  early  summer,  and  how, 
from  the  end  of  July  on,  the  process  of  "moving  the 
crops"  is  facilitated  by  an  expansion  in  the  bank 
note  circulation,  usually  from  19  to  24  per  cent.,  but 
sometimes  as  low  as  14  and  as  high  as  42  per  cent,  of 
the  minimum  during  the  year. 

As  they  represent  only  the  circulation  on  the  last 
day  of  each  calendar  month,  the  figures  do  not,  as  a 
rule,  exhibit  the  maxima  or  minima  actually  reached, 
and  so  do  not  fully  show  the  elasticity  of  the  currency. 
They  are,  further,  merely  typical,  and  do  not  rep 
resent  the  average  circulation  in  the  months  with 
which  they  are  connected.  They  fail,  also,  to  indi 
cate  the  different  movements  in  different  provinces. 
But  separate  tables  for  the  banks  domiciled,  e.  g., 
in  Quebec,  Nova  Scotia  or  New  Brunswick,  would 
be  just  as  useless  for  this  purpose.  The  business 
of  many  of  the  banks  is  carried  on  in  several 
provinces.  Their  activity  more  or  less  covers  the 
entire  national  field,  and  the  circulation  of  a  single 
bank  is  often  affected  by  as  many  compensatory  or 
opposite  influences  as  the  total  circulation  of  the 
whole  banking  system.  Moreover,  there  are  no  banks 
with  head  offices  in  Manitoba  or  the  Northwest  terri 
tories,  and  only  one,  with  six  offices,  has  its  principal 
Canadian  establishment  in  British  Columbia.  Yet 
there  are  seven  other  branches  in  British  Columbia, 
each  issuing  the  notes  of  its  parent  bank,  nineteen 
branches  in  Manitoba  and  eight  in  the  Northwest 


410  The  Canadian  Banking  System,  1817-1890 

territories.  A  table  by  provinces  would  be  utterly 
misleading. 

In  one  respect  the  arbitrary  choice  of  the  days  for 
which  the  circulation  is  indicated  ought  to  lend  some 
interest.  When  we  speak  of  a  late  or  early  season 
we  might  say,  more  clumsily  no  doubt,  that  the 
beginning  or  end  of  the  agricultural,  fishing  or  lum 
bering  year  has  not  coincided  with  the  usual  point  in 
the  calendar  year.  The  differences  in  the  lines  of 
the  chart  for  different  years  show  that  the  move 
ments  of  currency  are  automatically  adjusted  to  the 
needs  of  the  particular  times  in  the  industrial  year 
which  happen  to  correspond  with  the  last  day  of  each 
calendar  month.  The  proof  of  elasticity  is  varied, 
cumulative  and  conclusive. 

It  is  precisely  in  point  of  elasticity  that  the  Cana 
dian  bank  note  currency  is  superior  to  such  a  circu 
lation  as  the  bond-secured  notes  issued  by  the 
national  banks  of  the  United  States.  The  rigidity 
of  the  latter  currency,  the  almost  complete  lack  of 
relation  between  its  volume  and  the  currency  require 
ments  of  commerce,  have  been  too  frequently  pointed 
out  in  the  preceding  pages,  and  are  too  notorious 
facts  to  need  elaboration.  The  proof  can  be  found 
in  almost  any  treatment  of  the  question;  the  pages 
of  the  Proceedings  of  the  American  Bankers'  Asso 
ciation  have  bristled  with  it  for  five  years  and  more; 
the  statistics  in  the  reports  of  the  United  States 
Comptrollers  of  the  Currency  establish  it  beyond  a 
doubt;  and  in  these  last  days  the  American  bankers 
themselves  have  united  to  agitate  the  reform  of  their 
own  upon  the  lines  of  which  the  Canadian  system  of 
issue  is  one  of  the  best  examples  anywhere  to  be 
found. 


The  Canadian  System  of  Note  Issue  411 

Yet    every    good    quality    characteristic    of    the 
national  bank  note  pertains  to  the  Canadian  issues. 
They  circulate  at  par  throughout  the  land,  not  because 
they  are  a  legal  tender  to  any  bank,  but  because   (a) 
the   bank  which    issues   the   note  must  provide  for 
redemption  at  a  convenient   and   accessible   point  in 
each  of  the  seven  provinces  of  the   Dominion,   and 
(b)  the  possibility  of  converting  a  note  is  subjected 
to  the  daily  test  of  actual  redemption.     The  notes  of 
a  failed  bank,  whatever  the   condition  of  its  estate, 
will  be  redeemed   with    interest  at  6  per   cent,  per 
annum  within  ten  weeks  of  the  day  of  its  suspension. 
The   notes    of  a   failed    national    bank    pass   at   par 
because   their    ultimate    payment    is    certain;    other 
banks  are  obliged  to  take  them,  and  the  process  of 
retirement  is  practically  the  same  as  when  the  bank 
was  solvent;  those  of  an  unfortunate  Canadian  bank 
are  accepted  because  their  prompt  redemption  with 
interest  is  guaranteed.     Before  the  estate  of  a  bank 
in  liquidation,  whether  for  insolvency  or  otherwise, 
is  wound  up,  and  the  last  dividend,  if  there  is  any 
whatever,  is  paid  to  the  proprietors,  money  must  be 
deposited  with  the  government  in  sufficient  amounts 
to  redeem,    with   interest   for  the   first   two  months 
after  suspension,  all  of  its  notes  not  yet  presented 
and  still  outstanding.     This  regulation,  so  far  as  it 
prevents  the- operation  of  the  statute  of  limitations 
upon  bank  notes,  is  similar  to  the  requirement  that 
national   banks   shall   pay   enough    money  to   retire 
their  circulation  to  the  Treasurer  of  the  United  States 
before  they  may  withdraw  the  bonds  which  secure  it. 
To  the  holder  of  the  Canadian  bank  note,  therefore, 
it  is  a  matter  of  indifference  whence  or  when  it  was 
issued.     The  paper  of  the  smallest  bank  is  as  good 


412  The  Canadian  Banking  System,  1817-1890 

as  that  of  the  greatest.  At  all  times,  in  every  part 
of  Canada,  and  under  any  circumstances,  the  note  is 
not  only  worth  its  face  value  but  will  also  be  received 
at  that  by  any  bank.  Security  and  convertibility  are 
the  great  and  really  only  merits  of  the  national  bank 
note  currency.  The  Canadian  paper  has  these,  and 
it  has,  besides,  the  invaluable  quality  of  elasticity. 


§58. — ADVANTAGES     INCIDENTAL     TO    THE     CANADIAN 
SYSTEM  OF  ISSUE 

As  obtained  by  the  Canadian  system  of  issue,  elas 
ticity  involves  far  more  than  the  advantage  of  having 
a  currency  at  all  times  adjusted  to  the  need  for  it. 
Elasticity  in  currency  means  elasticity  in  the  loaning 
powers  of  the  banks.  The  need  for  augmented  circu 
lation  is  ordinarily  coincident  with  an  increased  need 
for  capital,  either  in  production  or  in  the  operations 
of  exchange.  Particularly  is  this  true  of  a  country 
whose  principal  industries  are  extractive,  a  country, 
e.  g.,  in  which  agriculture  and  lumbering  are  rela 
tively  more  important  than  manufactures.  As  eco 
nomic  instruments  for  the  collection,  safe-keeping 
and  employment  of  capital,  banks  are  ordinarily 
entrusted  with  funds  not  required  for  the  immediate 
purposes  of  the  owners.  When  more  capital  is  needed 
in  production  or  in  carrying  goods  with  the  intention 
to  market  them,  a  part  of  it  is  obtained  from  the 
banks  through  the  withdrawal  of  deposits  by  those 
to  whom  they  are  due.  Another  part  is  obtained 
from  loans  negotiated  with  the  banks  by  those  who 
prefer  or  are  obliged  to  operate  on  borrowed  capital. 
At  the  same  time,  however,  banks  are  under  advances 


Advantages  Incidental  to  Canadian  System  of  Issue    413 

to  persons  engaged  in  branches  of  industry  or  com 
merce  in  which  the  need  for  capital  is  comparatively 
steady. 

One  source  from  which  banks  supply  borrowers' 
needs,  the  capital  of  their  proprietors,  is  also  compar 
atively  steady.  Another  source,  the  money  entrusted 
by  depositors,  varies  according  to  the  wish  or  interest 
of  the  depositors,  and,  for  reasons  just  pointed  out, 
in  times  of  increased  activity  on  certain  lines  is  likely 
to  be  lessened.  The  banks  may  use  a  third  source, 
roughly  speaking,  in  two  ways:  they  may  give  bor 
rowers  book  credits  for  the  amount  of  their  loans,  or 
supply  them  with  notes.  Instead  of  capital  owned 
by  the  bank,  the  borrower  is  usually  willing  enough 
to  borrow  of  its  credit,  or  the  depositor  to  accept  of 
its  credit  in  payment,  provided  he  can  get  the  credit 
in  a  usable  form. 

But  book  credits  will  not  serve  the  purpose.  From 
prejudice,  habit  or  well  founded  preference,  the  lum 
berman  wishes  his  monthly  pay,  the  harvest  hand  his 
season's  wages,  and  the  farmer  the  proceeds  of  his 
grain  and  produce,  in  a  convenient,  unquestionable 
and  easily  transferable  form.  Money  will  satisfy 
them,  but  checks,  the  value  of  which  depends  on 
the  genuineness  of  signatures,  and,  to  a  certain 
extent,  upon  the  unknown  personal  credit  of  the 
maker  rather  than  on  the  well-known  and  ample 
credit  of  a  bank,  will  not  be  readily  taken.  Bank 
notes,  the  title  to  which  passes  by  simple  delivery 
and  the  value  of  which  is  dependent  on  the  credit  of 
the  public  bank  whose  name  they  bear,  are  the  only 
instruments  of  credit  available  for  large  classes  of  the 
transactions  necessary,  e.  g.,  to  moving  the  crops  or 
getting  out  the  lumber  cut.  To  meet  the  periodical 


414          The  Canadian  Banking  System,  1817-1890 

and  temporary  demands  for  added  capital  caused  by 
such  operations,  the  banks  must  either  pay  out  money 
or  issue  their  promissory  notes. 

The  abstract  statement  of  the  conditions  is  easily 
confirmed.  The  table  below  shows  that  in  the  first 
two  months  (August  and  September)  of  the  annual 
expansion  in  Canadian  trade,  bank  deposits  payable 
on  demand — the  basis,  that  is,  for  bank  credit  circu 
lating  in  the  form  of  checks — usually  remain  sta 
tionary  or  diminish,  while  the  amount  of  current 
loans  and  notes  in  circulation  rises  until,  at  the  end 
of  October,  both  are  considerably  above  the  figures 
for  the  31st  July.  For  every  year  since  1889,  the 
increase  in  each  has  been  at  least  $3,000,000,  except 
in  1893,  when  exceptional  conditions,  due  to  the 
American  crisis  and  the  contraction  in  many  branches 
of  Canadian  trade,  caused  a  diminution  in  current 
loans.1  The  figures,  of  course,  are  only  for  the  last 
day  of  each  month  and  they  represent  only  net  results. 
The  item  of  deposits,  for  example,  would  be  much 
less  if  the  figures  reflected  the  entire  amount  of 
funds  withdrawn.  The  apparent  effect  of  the  ten 
dency  of  depositors  is  somewhat  reduced  by  the  prac 
tice  of  borrowers  to  leave  negotiated  loans  on  deposit 
with  the  banks  until  they  need  to  use  the  funds. 
For  some  borrowers  the  season  of  active  operation 
arrives  later  than  for  others. 

What  would  happen  if  the  banks  were  obliged  to 
provide  money,  or  notes  (like  national  bank  notes) 
which  have  cost  them  value  to  an  equal  or  greater 
amount,  is  well  illustrated  year  after  year  in  the 
United  States.  In  the  autumn  those  who  trade  on 
their  own  capital  draw  on  their  deposits  with  the 

iSee  note  1,  next  page. 


Advantages  Incidental  to  Canadian  System  of  Issue    415 


banks;  the- needs  of  the  large  class  of  steady  discount 
customers  remain  about  the  same;  and  at  the  very 
moment  when  deposits  are  falling  off,  new  needs  for 
advances  arise  from  the  greatly  augmented  activity 
of  trade  in  grain,  pork,  cotton  and  produce.  The 
banks,  in  short,  find  the  demand  for  loans  strength 
ened;  their  ability  to  meet  it,  at  the  best  unimproved, 

1  TABLE  FOR  COMPARISON  of  the  amount  of  notes  in  circulation,  de 
posits  payable  on  demand  and  after  notice,  and  current  loans, 
at  the  end  of  months  prior  to,  during  and  after  the  annual  period 
of  greatest  expansion  in  the  Canadian  bank  note  currency  (00,000 
omitted) : 


July 

Aug. 

Sept. 

Oct. 

Nov. 

Dec. 

Jan. 

1890 
Motes  in  circulation.. 
Deposits    payable    on 
demand          .  . 

$ 
31.2 

54  6 

$ 
32.7 

53  8 

$ 
35.5 

54  7 

$ 
36.5 

57  5 

$ 
36.3 

53  1 

$ 
35.0 

53  7 

$ 
31.7 

so  7 

Deposits  payable  after 
notice  or  on  a  fixed 
day    ...         

766 

77  1 

77  7 

78  2 

79  9 

80  3 

QI  7 

Current  loans  

150.8 

151  2 

153  1 

153  0 

1  53  5 

153  2 

111    1 

1891 
Notes  in  circulation.. 
Deposits    payable    on 
demand           •         •  • 

30.6 
59  o 

32.0 
58  5 

34.1 
59  6 

37.2 
58  5 

37.4 
60  4 

35.6 
69  6 

32.7 

KQ    f\ 

Deposits  payable  after 
notice  or  on  a  fixed 
day         .  .       

84  6 

85  5 

86  0 

88  5 

89  3 

90  1 

Q9  ^ 

Current  loans  

184  5 

184  1 

185  9 

188  7 

187  8 

186  6 

104  () 

1892 
Notes  in  circulation... 
Deposits    payable    on 
demand  

32.5 
66  5 

32.6 

64  7 

34.9 
65  7 

38.7 
66  4 

37.1 
68  3 

36.2 

68  7 

32.8 

A7  4. 

Deposits  payable  after 
notice  or  on  a  fixed 
dav  •  . 

93  8 

98  0 

98  8 

99  9 

101  2 

101  5 

1A9  1 

Current  loans  

189  5 

186  3 

188  2 

194  1 

197  1 

198  5 

1Q7  '> 

1893 
Notes  in  circulation.. 
Deposits    payable    on 
demand  

33.6 
64  6 

33.3 
61  4 

35.1 
61  9 

36.9 
69  5 

35.1 
69  9 

34.4 
62  6 

30.6 
f»o  i 

Deposits  payable  after 
notice  or  on  a  fixed 
day           .... 

106  4 

105  0 

104  0 

103  5 

104  4 

107  Q 

inq  n 

Current  loans  

206.9 

'  205^9 

204.6 

204^8 

202.0 

200.4 

198.0 

416  The  Canadian  Banking  System,,  1817-1890 

and  more  than  likely  much  impaired.  Under  such 
conditions  the  rate  of  discount  inevitably  rises. 
Fluctuation  in  the  rate  of  discount  is  only  one  phase 
of  the  ensuing  inconvenience  and  expense;  there  are 
besides  this  the  annual  flow  of  currency  inland  from 
New  York  that  costs  at  least  one-tenth  per  cent,  of 
the  amount  of  the  remittances,  the  currency  famine 
frequently  arising  in  that  city  during  the  movement 
of  crops  to  the  markets,  and  in  consequence,  as  fre 
quent  arrests  of  the  forward  movement  of  products, 
hardly  less  complete  and  sudden  than  those  due  to 
freight  blockades  or  railway  strikes. 

In  Canada,  on  the  contrary,  banks  are  able  to 
supply  the  fluctuating  demands  of  depositor  and 
borrower  with  bank  credit  in  a  form  that  can  be  used. 
Each  is  paid  in  notes;  resources  employed  in  the  less 
variable  departments  of  discount  business  are  nowise 
diminished.  The  purchase,  transportation  and  mar 
keting  of  the  crops  are  accomplished  without  loss  or 
cost  to  the  banks,  without  the  rise  of  the  rate  of  dis 
count,  and  with  a  high  degree  of  efficiency,  economy 
and  promptness.  The  annual  expansion  in  the 
country's  business  tends  rather  to  ease  the  situation 
than  to  tighten  loan  markets.  The  goods  are  brought 
forward  so  rapidly  and  realized  on  so  soon  that  the 
banks,  whose  loans  to  grain  buyers,  produce  shippers, 
millers,  etc.,  are  generally  secured  by  such  documents 
as  warehouse  receipts  and  bills  of  lading,  find  that 
these  advances,  as  a  class,  are  among  the  most 
quickly  repaid  of  any  they  make. 

So  when  the  circulating  notes  in  which  the  advances 
were  made  begin  to  come  in,  the  banks,  if  redemp 
tion  should  be  called  for,  always  have  the  means  to 
meet  it.  Borrowers  have  already  discharged  their 


Advantages  Incidental  to  Canadian  System  of  Issue    417 

debts  by  drafts  on  the  Canadian  produce  markets,  or 
if  they  happen  to  be  in  the  export  trade,  by  exchange 
upon  American  and  British  correspondents.  In  actual 
practice,  however,  the  additional  circulation  is 
returned  to  the  banks  in  the  form  of  deposits.  The 
public  do  not  demand  a  money  redemption.  No 
bank,  to  be  sure,  receives  only  its  own  notes  from 
these  depositors.  What  notes  of  its  own  are  received 
are  retired  by  a  simple  credit  to  him  who  pays  them 
in.  The  notes  of  other  banks  thus  acquired  are  used 
to  offset  those  of  its  own  which  they  may  receive 
from  their  customers  and  present  in  the  daily  ex 
changes  as  claims  against  the  issuing  bank.  The 
process  of  contraction,  therefore,  is  almost  as  easy 
and  as  costless  to  a  well  managed  bank  as  that  of 
expansion.  Final  payment  of  the  autumnal  incre 
ment  to  liabilities  is  brought  about,  not  through 
immediate  redemption  in  hard  money,  but  through 
the  gradual  withdrawal  for  the  owners'  uses  of  the 
deposits  by  which  the  notes  were  first  retired  from 
circulation.1 

Compared  to  the  other  liabilities  on  which  banks 
trade,  the  note  circulation,  it  is  true,  seems  of  minor 
importance.  During  the  last  four  years,  for  Example, 
the  highest  amount  outstanding  has  never  been  much 
more,  and  usually  less,  than  a  fourth  of  all  the  public 
deposits  in  the  banks  at  corresponding  periods.  At 
first  thought  it  seems  unnecessary  to  emphasize  so 
strongly  the  advantages  derived  from  the  note  issue 

:For  illustration  of  this  last  fact,  the  table  lately  given  does  not 
include  a  sufficient  number  of  months.  The  other  statements,  how 
ever,  may  be  verified  by  it,  although  it  must  again  be  remembered 
that  the  figures  represent  only  net  results,  are  affected  by  a  variety 
of  influences  only  remotely  connected  with  the  forces  here  discussed, 
and  refer  only  to  seven  days  arbitrarily  chosen  in  each  year. 
27 


418          The  Canadian  Banking  System,  1817-1890 

as  a  means  of  expanding  loanable  credit.  But  the 
answer  to  the  objection  lies  in  the  simple  fact  that 
the  autumn  needs  form  the  last  increment  of  demand 
in  the  loan  market.  If  the  banks  were  unable  to 
supply  it  with  notes,  this  demand  would  be  turned 
upon  discount  resources  already  employed,  and  the 
cost  of  loans  would  be  higher  for  the  time,  not  only 
to  new  borrowers,  but  to  all  the  old  ones  as  well. 

There  are  still  other  reasons  why  elastic  issue  upon 
their  general  credit  is  one  of  the  most  beneficial 
functions  of  the  Canadian  banks.  The  remark  is 
offered  with  all  regard  to  the  extraordinary  growth 
of  deposits  exhibited  in  Appendix  I,  and  to  the  fact 
that  in  April,  May  and  June,  1894,  the  circulation 
fell  below  the  average  for  fifteen  years.  It  is  per 
fectly  true  that  in  the  most  progressive  Canadian 
communities,  checks  payable  to  order,  as  safe,  con 
venient  and  efficient  media  of  exchange,  are  fast 
supplanting  bank  note  currency;  that  the  establish 
ment  of  clearing  houses  facilitates  the  process;  and 
that  the  profit  from  circulation  paid  out  in  the  chief 
cities  is  considerable  only  by  reason  of  the  large 
volume  of  retail  transactions  in  which  bank  notes 
are  still 'the  medium.  The  average  life  of  the  notes 
issued  in  cities  is  comparatively  short;  a  bill  paid 
over  the  counter  of  a  Toronto  or  Montreal  office  one 
day  is  tolerably  certain,  in  two  cases  out  of  five,  to 
come  against  the  issuer  in  the  exchanges  of  the  next 
day  but  one.  But  banking  facilities  are  not  required 
by  the  most  progressive  communities  alone;  they  are 
at  least  proportionally  essential  to  districts  less 
advanced. 

In  many  of  the  less  advanced  or  less  wealthy  com 
munities  there  is  still  the  discount  business,  accumu- 


Advantages  Incidental  to  Canadian  System  of  Issue    419 

* 

lation  of  deposits  and  other  sources  of  banking  profits 
that  would  be  sufficient  to  support  local  banks. 
What  additional  advantages  are  derived  from  the 
establishment  of  branch  banks  to  meet  these  needs 
have  been  pointed  out  in  §  56.  There  are  many  other 
Canadian  communities,  however — communities  which 
we  may  describe  as  on  the  margin  of  the  supply  of 
banking  facilities — in  which  the  profits  of  the  loaning 
business  and  the  brokerage  on  deposits  combined 
would  not  pay  the  expenses  of  a  local  joint-stock 
bank.  The  conditions  on  which,  through  the  estab 
lishment  of  branch  banks,  they  do  secure  the  facili 
ties  necessary  to  their  development,  are  the  peculiar 
possibilities  of  profit  and  economy  under  the  Cana 
dian  system  of  issue. 

Where  notes  are  based  on  the  general  credit  of  the 
promissors,  an  increase  in  a  bank's  circulation  is  a 
means  of  additional  profit.  Now,  where  there  are 
no  banking  facilities  in  the  immediate  neighborhood 
—in  villages  and  the  surrounding  country  whence 
both  villages  without  banks,  and  the  smaller  towns 
where  branches  have  been  placed,  chiefly  derive  their 
support — payments  are  very  seldom  made  in  checks. 
The  credit  economy  of  such  localities  and  districts  is 
still,  to  a  great  extent,  in  the  first  stages  of  develop 
ment.  Among  their  people  and  in  retail  trade, 
promises  have  supplanted  money  only  in  the  form 
nearest  like  money,  viz.,  bank  notes.  Access  to 
banks  is  less  convenient.  Persons  receiving  notes 
are  often  unable  promptly  to  make  a  deposit,  or 
prefer  to  hold  a  certain  quantity  of  this  currency  in 
provision  against  payments  for  which  distance  from 
the  bank,  custom  or  the  preferences  of  the  payees, 
make  checks  unsuitable.  Then,  too,  the  habit  of 


420  The  Canadian  Banking  System,  1817-1890 

» 

relying  upon  banks  for  the  safe- keeping  of  spare 
cash  is  less  strong.  So  the  "  life  "  of  a  note  is  much 
longer  in  the  country  and  country  towns  than  in  the 
cities.  While  the  amounts  circulated  by  branches 
in  sparsely  settled  or  newly  opened  districts,  are 
small  compared  with  the  payments  made  by  city 
offices,  considerable  proportions  of  the  bills  issued 
for  use,  e.  g.,  in  paying  the  wages  of  farm  hands  and 
lumbermen,  are  neither  seen  nor  heard  of  for  average 
periods  of  from  two  to  six  months. 

By  establishing  offices  in  the  country  districts  and 
newly  settled  towns,  and  by  supplying  the  local  need 
for  loans,  cashing  drafts  and  otherwise  assisting  in 
the  transfer  of  money,  a  parent  bank  is  able  to  get 
this  longer,  larger  and  more  profitable  circulation 
for  its  own  paper.  Through  judicious  support  of  the 
local  trade  and  industry,  the  branch  at  the  same 
time  extends  the  field  for  safe  and  profitable  discount 
operations.  The  greater  number  of  exchanges  con 
sequent  on  this  development  improves  in  a  manner 
the  opportunity  for  increasing  the  note  circulation; 
by  providing  a  place  of  security  for  spare  cash,  and 
by  paying  interest  on  sums  entrusted  to  it,  the  bank 
stimulates  accumulation  and  promotes  also  the  growth 
of  its  deposit  business. 

The  possibility  of  economy  under  the  Canadian 
system  of  issue  and  of  branch  banking  lies  in  the 
use  of  unissued  notes  as  till  money.  The  Canadian 
note,  like  others  based  on  the  credit  of  banks  and  not 
secured  by  the  pledge  of  particular  assets,  has  no 
value,  except  the  cost  of  printing,  while  in  the  pos 
session  of  the  bank  whose  promise  it  bears.  It  is  the 
evidence  of  a  contract  to  which,  as  yet,  the  promissor 
is  the  only  party.  Unissued  notes  represent  no  more 


Advantages  Incidental  to  Canadian  System  of  Issue    421 

expenditure,  no  more  wealth,  than  the  result  of  a 
morning  spent  in  writing  lOU's  with  the  intention 
some  time  to  exchange  them  for  value.  Yet  unissued 
notes,  except  as  small  change,  and  for  the  purposes 
of  the  customer  who  occasionally  requires  a  gold 
piece,  serve  every  use  obtainable  by  any  branch 
bank  from  money  itself. 

Banks  have  two  principal  classes  of  payments  to 
meet,  payments  to  the  public  and  to  each  other.  Ex 
cept  when  situate  at  the  financial  centers,  Canadian 
banking  offices  usually  settle  with  each  other  by 
means  of  drafts  upon  correspondents  in  those  centers 
(Toronto,  Montreal,  Halifax).  They  need,  then,  no 
localized  supply  of  money  for  these  payments,  but  a 
sufficient  reserve  or  balance  in  the  place  where  drafts 
are  due.  Payments  to  the  public  are  of  two  sorts. 
Payments  required  for  the  purpose  of  remitting  funds 
to  outside  localities  are  made  by  drafts  upon  the  place 
to  which  the  remittance  is  desired,  or  by  drafts  upon 
the  financial  centers.  The  only  purpose  for  which 
actual  money  would  be  used,  i.  e.,  payments  to  the 
public  in  the  locality  where  the  branch  is  situate,  is 
satisfactorily  served  by  bank  notes,  a  form  of  pay 
ment  which  costs  the  bank  nothing  to  keep.  The 
security  of  this  circulating  medium  is  so  complete 
that  notes  are  freely  accepted  by  the  public,  even  at 
times  of  runs  upon  deposits.  Note  redemption  is 
brought  about  either  by  deposits  of  its  own  notes 
made  with  the  bank,  or  through  the  settlement  of 
balances  exacted  by  competitive  banks.  The  one 
method  merely  effects  the  metamorphosis  of  the  credit 
accorded  the  bank  by  its  customers.  When  balances 
in  the  daily  bank  exchanges  are  against  it,  a  solvent 


422  The  Canadian  Banking  System,  1817-1890 

bank  in  good  repute  can  always  effect  redemption  in 
the  other  method  by  drafts  upon  the  financial  centers. 

Under  the  "Canadian  system  of  issue,  therefore, 
banking  is  carried  on  without  the  necessity  and  ex 
pense  of  localizing  at  each  office  a  money  reserve, 
and  sufficient  till  money  of  intrinsic  value,  to  guard 
against  all  contingencies.  It  does  not  follow  that 
the  reserves  are  weaker;  on  the  contrary,  they  are 
quite  likely  to  be  stronger.  Placed,  as  they  are,  at 
the  centers,  reserves  are  available  in  their  entire 
strength  for  meeting  demands  wherever  such  arise. 
Furthermore,  settlements  between  the  banks  are 
accomplished  with  a  higher  economy  of  the  use  of 
money.  Practically  none  passes  between  the  banks 
outside  the  centers,  and  at  the  centers  money  pay 
ments  are  only  used  to  discharge  balances.  The  gain 
in  efficiency  of  the  reserves  is  supplemented  by  econ 
omies  in  their  maintenance.  Where  the  market  for 
securities  is  strong  and  active,  part  of  the  reserves 
may  be  invested  in  first-class  bonds  and  stocks,  or 
loaned  at  call  on  the  pledge  of  such  bonds  or  stocks. 
The  cost  of  holding  large  amounts  of  idle  cash  as 
protection  against  possible  dangers  is  thus  materially 
reduced  in  a  way  scarcely  possible  when  reserves  are 
localized;  local  markets  could  seldom  be  relied  upon 
for  the  prompt  conversion  of  securities. 

How  great  is  the  saving  of  interest  on  the  hard 
cash  which,  without  the  ability  to  use  unissued  notes, 
the  banks  would  be  obliged  to  hold  as  till  money,  is 
not  particularly  difficult  to  calculate.  A  "suit  of 
notes,"  i.  e.,  the  quantity  of  bills  prepared,  signed 
and  delivered  to  the  various  offices  of  a  bank,  is,  as  a 
rule,  from  one  and  a  half  to  two  times  as  great  as 
the  highest  proportion  thereof  ever  in  circulation. 


Advantages  Incidental  to  Canadian  System  of  Issue    423 

The  advantage  to  the  banks,  and  here,  also,  to  the 
public,  is  not  due  to  a  new  profit,  but  to  the  economy 
of  real  capital  possible  by  use  of  notes  as  till  money. 
If  the  banks  were  deprived  of  this  advantage,  it  is  safe 
to  say  that  they  would  be  obliged  to  withdraw  some 
$10,000,000  to  815,000,000  now  employed  in  the  trade 
and  industry  of  Canada.1  This,  be  it  understood,  is 
quite  independent  of  the  $30,000,000  to  $38,000,000 
more  that  the  banks  would  necessarily  withdraw  if 
they  were  obliged  to  secure  their  notes  by  pledge 
of  bonds,  or  were  subjected  to  almost  any  other  regu 
lation  under  which  it  would  cease  to  be  practicable 
or  advantageous  to  use  unissued  notes  to  fill  their 
tills.2  Without  the  saving  on  till  money  and  the 
extra  gain  from  rural  circulation,  the  banks  could 
not  serve  the  country  so  cheaply  as  they  do  now. 

'Cf.  R.  H.  Inglis  Palgrave,  "Analysis  of  the  Evidence  taken  be 
fore  the  Select  Committee  of  the  House  of  Commons  on  Banks  of 
Issue,  1875,"  London,  1876,  p.  11;  also  Replies  to  Questions  3801-3, 
4408-9,  in  the  evidence  itself. 

-'Under  the  so-called  "Baltimore  plan"  lately  approved  by  the 
American  Bankers'  Association,  the  American  banks  and  public 
would  enjoy  the  increase  of  loanable  funds  possible  under  a  system 
of  issue  against  the  general  credit  of  the  promissors,  but  many  of 
the  banks  would  be  prevented  by  the  very  activity  of  their  business, 
from  sharing  the  advantage  of  costless  till  money  naturally  incident 
to  such  a  system.  Each  bank  would  receive  only  the  amount  of  its 
authorized  circulation  in  bills  prepared  by  the  United  States  gov 
ernment,  and  as  the  limit  proposed  for  each  is  only  half  the  amount 
of  its  paid-up  capital  stock,  it  is  probable  that  a  great  many  of  the 
banks  would  be  able  to  circulate  up  to  their  limit  and  thus  have  no 
notes  left  for  their  tills.  One  way  to  secure  the  advantage  would 
be  to  transform  the  "surplus,"  in  many  cases  now  very  large,  into 
capital.  But  when  a  bank's  operations  are  confined  to  a  single 
locality  and  one  office,  till  money  becomes  practically  indistinguish 
able  from  cash  reserve.  The  importance  of  economies  in  till  money 
is  not  so  great  as  under  a  system  in  which  the  issue  of  notes  against 
general  credit  is  scientifically  combined  with  branch  banking. 


424          The  Canadian  Banking  System,  1817-1890 

With  the  sources  of  their  advances  partly  diverted 
to  other  purposes  and  partly  dried  up,  they  would  be 
obliged  to  raise  the  rate  of  discount  or  begin  a  long 
course  of  personal  discrimination  in  supplying  the 
needs  of  their  customers. 

Many  communities  enjoying  the  support  of  banks 
as  wealthy,  well  managed  and  strong  as  those  in  the 
largest  cities,  could  no  longer  have  such  facilities 
within  their  midst.  Deposits  at  places  u  on  the  mar 
gin  of  supply"  are  often  insignificant  and  the  bro 
kerage  on  them  trifling:  the  profit  on  loans  and 
discounts,  even  with  the  additional  charge  of  one- 
half  to  ,one  and  a  half  per  cent,  on  account  of  the 
inferiority  of  the  local  security,  is  comparatively 
slight.  Unsupplemented  by  profit  on  circulation  and 
diminished  by  interest  on  till  money,  the  two  together 
would  often  fail  to  pay  the  salaries,  postage  and  rent 
of  a  branch.  Without  the  saving  and  the  extra  gain 
effected  under  the  Canadian  system  of  issue,  the 
extension  of  branch  banking  would  have  been  neither 
so  wide  nor  so  thorough  as  it  has  been.1  Peculiar 
possibilities  of  profit  have  induced  the  banks  to 
establish  new  branches,  and  competition  between  the 
banks  has  forced  them  to  divide  the  profit  with  the 
public. 

1B.  E.  Walker,  "Banks,  Canada,"  in  Inglis  Palgrave's  "Dictionary 
of  Political  Economy,"  New  York,  1894,  vol.  i.,  p.  100.  "The  pro 
portion  of  deposits  to  capital  is  still  so  small  *  that  branch 
banking  could  not  have  reached  its  present  comparatively  perfect 
development,  but  for  the  note  issues  not  being  specially  secured.  It 
has  been  argued  that  if  this  power  was  taken  away  or  replaced  by  a 
specially  secured  issue,  perhaps  one- half  of  the  branches  would 
have  to  be  closed." 


Reserves  425 

§59. — RESERVES 

Gold,  as  we  have  seen,  is  no  part  of  the  mechanism 
of  Canadian  banking  operations  outside  the  centers. 
Except  for  making  change  under  five  dollars,  there 
is  a  like  economy  of  other  kinds  of  money,  e.  g., 
Dominion  notes,  for  which  gold  or  its  equivalent  must 
be  given.  We  have  seen  further  that  the  chief 
banking  reserves  of  the  country,  as  in  Great  Britain 
and  the  United  States,  are  concentrated  and  kept  in 
the  principal  money  markets  of  the  land.  Five- 
eighths  of  all  the  banks  in  Ontario  and  Quebec  have 
their  head  offices  either  in  Montreal  or  Toronto,  and 
five-eighths  of  the  Nova  Scotia  banks  have  their  prin 
cipal  establishments  at  Halifax.  The  proportion  of 
banking  capital  managed  from  the  centers  is  much 
greater  (vide  §  56).  So,  too,  with  reserves.  Though 
it  was  more  or  less  distributed  among  their  branches, 
these  twenty  institutions  controlled  $17,063,686  of 
the  $20,978,623  of  specie  and  Dominion  notes  held 
by  all  the  banks  in  the  country  on  the  31st  December, 
1893.  On  the  30th  June,  1894,  the  proportion  was 
$17,647,555  to  $21,455,217.  Banks  with  head  offices 
elsewhere  situate  either  have  branches  of  their  own 
in  one  or  more  of  these  cities,  or  keep  balances  on 
deposit  with  other  banks  there.1  Four  banks,  one  in 

xThi8  statement,  like  many  others  of  a  similar  generality,  needs 
some  qualification.  The  banking  development  of  Canada  is  not 
altogether  homogeneous,  any  more  than  the  climate,  the  race  types, 
the  trade  and  economic  interests  in  different  parts  of  the  country 
are  cast  in  one  mould.  The  trouble  is,  the  very  distance  of  the  sev 
eral  provinces  and  of  the  areas  of  thickest  settlement,  one  from  the 
other,  presents  a  serious  obstacle  to  Canadian  unity.  In  many  res 
pects  the  old  provincial  separation  still  survives,  and  there  are  a 
few  banks  the  farthest  limits  of  whose  operations  are  the  boundaries 
of  their  respective  provinces.  The  business  of  the  Maritime  Prov 
inces  is  quite  distinct  in  numerous  important  details  from  that  of 


426  The  Canadian  Banking  System,  1817-1890 

Toronto,  two  in  Montreal  and  one  in  Halifax,  appar 
ently  have  the  lion's  share  of  the  business  as 
bankers'  banks.  On  the  31st  December,  1893,  they 
had  $1,845,057  of  the  $2,420,874  reported  as  "deposits 
payable  on  demand,  or  after  notice,  or  on  a  fixed  day, 
made  by  other  banks  in  Canada; "  on  the  30th  June, 
1894,  $1,800,214,  out  of  a  total  of  $2,352,505^ 

But  there  is  this  difference,  already  noted  in  an 
other  connection,  between  the  Canadian  organization 
of  credit  and  that  of  Great  Britain  or  the  United 
States.  The  centralization  of  banking  management 
permits  practically  the  same  disposition  of  the  bank 
ing  reserves  during  critical  periods  as  in  ordinary 

Quebec,  and  in  spite  of  their  long  union,  Ontario  and  Quebec  could 
not,  without  exceptions,  be  [described  as  one  undivided  field  of 
activity.  Of  really  characteristic  banks  of  the  Canadian  system, 
however,  every  one  of  the  larger  provinces,  except  New  Brunswick, 
perhaps,  and  Manitoba,  has  one  or  more  principal  establishments. 
These  corporations  have  placed  offices  in  provinces  other  than  the 
site  of  their  head  offices,  and  some  of  them  have  opened  up  in 
British  Columbia,  Manitoba  or  New  Brunswick;  others  again  in  two 
or  three  provinces  besides  their  own.  It  is  chiefly  such  banks  of  a 
national  or  semi-national  activity  and  importance  that  should  be 
kept  in  mind  while  the  Canadian  banking  system  as  a  whole  is 
under  discussion.  Still,  remarks  about  them,  except  those  relating 
to  territorial  extension,  generally  apply  with  scarcely  diminished 
force  to  Canadian  banks  of  a  more  local  character. 
1(The  proportions  for  each  of  the  four  banks  were: 

on  the  31 
Dec.,  1893  30  June,  1894 

Bank  of  Montreal $695,044  $703,460 

Canadian  Bank  of  Commerce...  275,966  273,748 

Merchants'  Bank  of  Canada 753,661  588,601 

Merchants'  Bank  of  Halifax. ...  119,786  234,405 

Total,    4  banks $1,845,057  $1,800,214 

Total,  39      "      2,420,874*  2,352,405 

How  far  the  Bank  of  Montreal  is  the  ''Canadian  Bank  of  England," 
appears  in  respect  to  the  item  of  bankers  balances  from  the  figures 
*  Less  Commercial  Bank  of  Manitoba,  $520. 


Reserves  427 

times.  Conflict  of  interest  between  urban  and  rural 
banks,  and  the  institution  of  dangerous  inland  drains, 
are  evils  of  panicky  times  in  these  other  countries 
that  Canadian  banks  are  usually  able  to  escape. 

The  arguments  for  requiring  banks  always  to  hold 
money  reserves  equal,  at  least,  to  a  fixed  proportion 
of  their  liabilities,  are  hardly  a  part  of  our  subject. 
There  is  no  such  obligation  laid  on  the  Canadian 
banks.  It  may  be  possible,  by  regulation  of  this 
type,  to  compel  certain  loosely  managed  banks  to 
keep  on  hand  more  nearly  an  adequate  supply  of 
cash,  but  behind  the  policy  there  lurks  the  theory 
that  legislators  better  understand  the  right  conduct 
of  banking  than  bankers  themselves.  The  arguments, 
valid  in  Canada,  against  a  fixed  reserve,  have  been 
given  at  length  in  our  statement  as  to  certain  pro 
ceedings  preliminary  to  the  Bank  Act  revision  of 
1890.  To  recapitulate  here,  the  most  obvious  is  the 
principle  that  a  banking  reserve  is  a  resource  to  be 
used  rather  than  to  be  gloated  over  and  talked  about, 
just  as  fresh  troops,  if  available,  are  used  to  turn  the 
tide  of  a  hard  fought  and  undecided  battle.  The 
military  analogy  is  clear.  Aside  from  this  consider- 
just  given.  It  is,  to  be  sure,  the  oldest  and  by  far  the  largest  bank 
in  Canada.  It  is  the  government's  depository  and  fiscal  agent;  in 
the  money  markets  of  Chicago,  New  York  and  London,  the  three 
great  centers  of  commerce  for  English  speaking  races,  it  is  a  factor 
whose  importance  may  justly  be  termed  considerable.  In  Canada 
its  control  of  enormous  resources  makes  the  Bank  of  Montreal  a 
tower  of  strength  to  the  banking  system.  It  commands  the  highest 
respect,  the  unwavering  confidence  and  the  implicit  reliance  of  the 
entire  country.  But  it  has  no  peculiar  privileges,  no  qualified  mon 
opoly  like  the  Bank  of  England,  and  its  former  predominance  is 
somewhat  lessened  by  the  fact  that  there  are  now  two  other  banks 
whose  combined  resources  are  nearly  equal  to  its  own.  Many  of 
the  other  banks  also,  are  now  richer  and  more  powerful,  compared 
to  the  Bank  of  Montreal,  than  were  its  competitors,  e.  g.,  in  1867. 


428  The  Canadian  Banking  System,  1817-1890 

ation  we  have  to  note  the  false  security  induced;  the 
fact  that  the  requirement  has  not  been  lived  up  to  in 
the  United  States;  the  rise  of  the  rate  of  interest 
occurring  when  reserves,  e.  g.,  in  the  city  of  New 
York,  are  reduced  to  near  the  legal  minimum;  the 
necessarily  somewhat  greater  instability  of  commer 
cial  confidence  under  such  regulations;  and  the  suffi 
ciency,  proved  by.  Canadian  experience,  of  the  first 
lien  as  security  for  the  ultimate  payment  of  note 
holders. 

Some  illustrations  have  been  given  of  the  manner 
in  which  the  reserves  of  well  managed  banks  vary  in 
height  at  different  times.  They  also  vary  in  compo 
sition  according  to  the  circumstances  of  different 
banks.  A  bank  with  its  head  office  in  Hamilton, 
Ottawa  or  Sherbrooke,  needs  to  keep  its  principal 
reserves,  not  as  money  at  its  principal  establishment, 
where  payments  to  the  public  are  chiefly  in  notes  and 
to  the  banks  in  drafts,  but  as  a  balance  in  Montreal 
or  Toronto,  where  the  principal  demands  upon  its 
reserves  are  payable.  And  among  banks  situate  in 
the  centers,  there  is  the  greatest  diversity  as  to  busi 
ness.  Some  specialize  in  agricultural  business;  some 
have  a  high  proportion  of  lumber  accounts;  some  en 
joy  the  custom  of  large  importing  houses  with  heavy 
customs  duties  to  pay  from  time  to  time;  others  may 
be  characterized  as  largely  tradesmen's  banks,  and 
others  are  heavy  dealers  in  exchange;  or  again,  the 
proportions  in  which  various  banks  combine  such 
classes  of  trade  are  different  for  each  one.  Some 
banks  have  enormous  balances  loaned  at  call  in  the 
United  States,  others  hardly  any  whatever.  For 
some  the  amount  of  deposits  payable  after' notice  or 
on  a  fixed  day,  is  twice,  for  some  thrice,  for  others 


Reserves  429 

four  times,  the  amount  payable  on  demand.  Some 
have  issued  notes  close  to  the  authorized  limit,  two 
or  three  circulate  barely  one-fifth  of  what  they  law 
fully  may.  One  bank,  at  least,  has  heavy  govern 
ment  deposits,  and  is  constantly  called  on  for  large 
payments  of  hard  cash;  others  have  no  government 
account  whatever,  or  only  the  small  deposits  they 
have  obtained  as  temporary  keepers  of  revenue  where 
the  fiscal  agent  has  no  office. 

What  legislator,  then,  what  banker,  or  what  con 
vention  or  committee  of  bankers  can  rightly  fix  the 
proportion  of  specie  and  Dominion  notes  a  bank  shall 
always  hold  against  its  liabilities  ?  The  true  propor 
tions  are  as  many  as  the  banks  themselves,  as  diverse 
as  the  character  of  their  business  on  both  sides  of  the 
account,  and  as  changing  as  times  and  circumstances. 
At  best  the  establishment  of  a  minimum  reserve  is 
an  attempt  to  do  by  legislation  what  legislation  can 
not  accomplish.  Laws  may  forbid  corporations  to 
engage  in  any  but  a  strictly  banking  business,  but 
for  the  wise  conduct  of  that  business,  the  only  real 
provisions  are  the  bank's  instincts  of  self-preservation, 
and  the  enlightened  self-interest  of  shareholders  and 
directors  in  choosing  efficient,  experienced  men  to 
manage  their  trust.  Upon  directors  and  managers 
alone  depends  the  choice  of  a  bank's  investments; 

according  to  the  wisdom  or  folly  of  their  choice 

the  value  and  liquid  nature  of  its  loans,  or  the  depre 
ciation  and  fixity  of  its  investments — the  bank  will 
prosper  or  perish.1 

1Cf.,  on  the  question  of  reserves,  the  general  principles  laid  down 
by  the  eminent  German  authority,  Dr.  Adolph  Wagner,  in  his 
treatment  of  "  Der  Kredit  u.  das  Bank  Wesen."  First  as  to  the 
reserve  of  the  bank  of  issue:  "The  only  theoretically  and  practi 
cally  correct  covering  for  notes  (deckung)  is  the  one  obtained  by 


430  The  Canadian  Banking  System,  1817-1890 

For  the  four  and  one-half  years  preceding  the  1st 
July,  1894,  the  amounts  of  specie  and  Dominion  notes 
held  by  all  the  chartered  banks  at  the  end  of  each 
calendar  month  have  averaged  9.11  per  cent,  of  their 
total  liabilities  on  corresponding  days.  The  lowest 
percentage  shown  by  the  Bank  Statement  was  8;  the 
highest,  10.08  per  cent.  This,  it  will  be  observed,  is 
quite  as  high  as  the  proportion  of  money  kept  on 
hand  by  the  English  joint-stock  banks,  although  for 
most  of  them  gold  and  its  practical  equivalent,  Bank 

banking  operations  (bank  rniissige);  that  is,  the  covering  with  cash 
in  proper  combination  with  easily  realized,  short  term,  rights  to 
demand,  i.  e.,  discounted  notes.  But  the  correct  height  of  the  specie 
reserve,  or  its  minimum,  cannot  be  determined  for  the  bank  of 
issue  either  in  absolute  figures  or  as  a  proportion  of  the  outstanding 
circulation.  It  depends  on  the  general  condition  of  credit,  on  the 
credit  of  the  bank,  on  the  state  of  the  money  market,  on  the  con 
ditions  of  industry,  commerce  and  politics,  on  the  course  of  foreign 
exchange,  on  the  periodical  need  of  commerce  for  currency — upon 
which  the  value  of  the  smallest  notes  is  also  influential.  The  cash 
reserve  must  also  suffice  for  any  unusual  return  of  notes  to  the  bank 
for  redemption.  It  can  never  be  considered  alone,  but  only  in  con 
nection  with  the  other  assets,  especially  the  discounts,  and  must 
naturally  be  higher  for  a  bank  of  issue,  when  at  the  same  period  it 
holds  large  amounts  of  deposits  either  on  time  or  at  call." 

Next,  as  to  the  cash  or  money  reserve:  "The  Cash  Reserve.  Its 
proper  amount  is  dependent  upon  the  time  which  the  bank's  lia 
bilities  have  to  run, — as  to  those  due  on  demand  (notes  and  deposits), 
upon  their  variable  amount  and  the  time  of  the  actually  resulting 
demands— and  further  upon  the  demands  for  credit  to  which  the 
bank  must,  in  the  course  of  business,  regularly  respond.  With 
deposits  at  call  or  short  notice,  the  reserve  must  be  larger  than  with 
deposits  at  long  notice.  Further,  the  conditions  of  the  time,  the 
state  of  politics,  of  the  money  market,  the  course  of  the  foreign 
exchanges,  etc.,  etc.,  are  to  be  regarded.  Now  a  larger,  now  a  smaller 
reserve  need  be  maintained,  especially  when  the  other  assets  are 
easily  and  speedily  available  (realizable).  *  *  *  *  The  cash 
reserve  at  any  one  time  really  adequate  can  only  be  determined  by 
the  bank  itself." 

FftfeScbonberg (editor),  "Handbuch  der  Politischen  CEkonomie," 
Tubingen,  1890,  vol.  i,  pp.  4(52  and  438. 


Reserves 


431 


of  England  notes,  are  the  only  till  money  and  form 
parts  of  their  business  machinery.  Of  the  entire 
banking  reserve,  it  is  needless  to  say,  money  forms 
only  a  part;  the  immediately  available  assets  held 
by  the  Canadian  banks,  like  those  held  by  the 
English  banks,  are  in  much  higher  ratio  to  the  total 
liabilities  of  the  system.  Thus,  the  items  which  may 
be  taken,  in  a  rough  way,  as  constituting  the  bank 
ing  reserve  of  all  the  Canadian  banks  were  reported 
at  the  following  amounts: 


31st  Dec.,  1893  30th  June,  1894 


1.  Specie  and  Dominion  notes $20,978,623  !  $21  455  <?11 

2.  Balances  due  from  agencies  of  the  bank 

or  from  other  banks  or  agencies  in 

foreign  countries 38,229,248  !  16,650  822 

o.  Balances  due  from  agencies  of  the  bank 

or   from  other  banks  or  agencies  in 

the  United  Kingdom 3  540  999  !  3  osfi  1 67 

4.  Dominion  Government  debentures  or 

..  nstoc]5. :-.-•• 3,191,383  \  3,157,413 

o.  Canadian  municipal  securities  and 

British  provincial  or  foreign  or  colo- 

nial  public  securities 9,981,680  10,859,394 

6.  Canadian,  British  or  other  railway 

securities..  6,692,8561  8,240,707 

/ .  Call  loans  on  bonds  or  stocks 14,236,629  14  600  915 

b.  Deposits  payable  on  demand,  or  after 

notice  or  on  a  fixed  day,  made  with 

other  banks  in  Canada I      3,630,883        3,287,255 

Tnf  i  r  i-rr0tal $80,481,522    $80,337,784 

Total  liabilities 218,622,965     221  292  707 

Percentage  of  reserve  to  liabilities 36  85  I  36  30 


As  might  be  expected,  the  proportion  of  the  various 
components  to  the  whole  reserve,  and  of  the  reserve 
to  total  liabilities,  varies  widely  as  between  different 
banks.  Rather  interesting  comparisons  and  a  sub 
stantial  basis  for  criticism  could  be  derived  from  a 
table  showing  month  by  month  for  a  series  of  years 


432          The  Canadian  Banking  System,  1817-1890 

the  proportion  of  quick  assets  held  by  the  several 
banks  against  their  total  debts. 

There  are  two  objections,  however,  to  the  inclusion 
of  such  a  table  here,  its  great  bulk  and  the  ambiguity 
of  certain  items  in  the  form  of  the  statement  to  the 
government.  Some  call  loans,  e.g.,  maybe  speedily 
realized  only  at  a  considerable  cost.  Only  for  the 
bank  to  which  they  belong  is  it  possible  closely  to 
estimate  the  amount  of  its  assets  immediately  avail 
able,  either  for  conversion  into  cash  in  Canada  or  in 
the  United  States  and  Great  Britain,  as  a  balance 
against  which  to  draw  bills  of  exchange.  This  view 
of  the  question  is  admittedly  somewhat  doubtful. 
Any  banker  whom  one  addressed  would  probably 
deny  its  pertinence  to  his  own  bank  and  aver  that 
the  quick  assets  held  by  his  institution  were  of  the 
gilt-edge  type  throughout.  Very  properly,  too,  he 
might  express  ignorance  as  to  the  position  of  his 
competitors  in  this  respect.  A  more  reasonable  view 
of  the  question  would  be  to  take  it  for  granted  that 
public  securities,  railway  bonds  and  call  loans  are 
worth  approximately  what  they  are  set  down  for, 
and  usable  whenever  required. 

On  this  supposition  I  have  made  a  study  of  the 
Bank  Statement  for  the  last  five  years,  with  particu 
lar  reference  to  reserves.  For  most  of  the  banks  the 
results  form  highly  creditable  indications  of  the 
watchful  care  of  managers  in  guarding  the  stability 
of  their  institutions  and  in  keeping  ample  provision 
for  every  contingency.  But  the  reserves  of  a  few 
banks  have  almost  regularly  been  below  the  point 
which  the  managers  of  other  banks,  not  too  dissimi 
larly  situate,  have  seemed  to  regard  as  both  prudent 
and  safe.  This  fact — the  common  property  of  all 


Reserves  433 

who  take  sufficient  interest  in  banking,  carefully  to 
study  the  monthly  statement — is  one  reason  for  the 
opinion  elsewhere  advanced  (§55),  that  the  number 
of  Canadian  chartered  banks  may  be  less  in  the 
future  than  it  is  to-day. 

One  of  the  most  beneficial  minor  effects  of  the 
Bank  Circulation  Redemption  Fund  has  been  the  new 
community  of  interest  among  banks  which  grows  out 
of  their  common  liability  with  respect  to  the  cur 
rency.  It  is  believed  that  this  advantage  is  hardly 
less  than  that  derived  in  the  United  States  from  the 
plan  of  combined  reserves,  but  it  is  realized  in  a 
somewhat  different  way.  The  effects  of  the  fund 
chiefly  appear  in  the  greater  interest  taken  by  banks 
in  each  other's  welfare,  the  stronger  solidarity  in 
maintaining  confidence,  the  inclination  more  promptly 
to  grant  deserved  assistance,  and  the  more  powerful 
motive  to  act  as  mentor  in  recalling  somewhat  errant 
banks  to  the  paths  of  sound  policy.  The  strong 
banks  have  themselves  the  power  to  bring  flighty 
ones  to  time,  e.  g.,  in  the  last  resort,  by  refusing  to 
take  checks  upon  them.  Other  sanctions  are  less 
severe;  banks  not  relatively  so  strong  are  frequently 
in  need  of  loans  or  other  accommodation,  and  a  word 
or  two  from  the  grantor  of  the  accommodation  is 
generally  sufficient. 

But  the  day  may  come  when  a  bank  or  banks,  who 
have  heeded  neither  friendly  warning  nor  safe  prin 
ciples,  and  who  have  long  lacked  reserves  by  others 
thought  adequate,  will  be  unable  without  help  to 
make  the  payments  so  rigidly  exacted  by  Canadian 
banks  in  settlement  after  the  daily  exchanges.  And 
then  it  can  hardly  be  expected  that  other  banks  will 
consent  to  prolong  the  existence  of  competitors  who 
28 


434          The  Canadian  Banking  System,  1817-1890 

have  constantly  borrowed  at  more  and  loaned  at  less 
than  the  current  rates,  who  have  "  persistently  built 
upward  and  outward  the  fabric  of  credit  while  per 
sistently  whittling  away  its  base."  In  a  system 
where  the  security  of  banking  operations,  within,  of 
course,  the  field  where  banks  may  work,  is  almost 
entirely  dependent  on  the  skill  and  sagacity  of  bank 
ing  management,  the  presence  of  institutions  in  any 
wise  badly  managed  is  an  annoyance  to  well  gov 
erned  banks  and  a  menace  to  the  stability  of  com 
mercial  confidence.  It  not  only  aggravates  banking 
competition,  but  it  keeps  a  host  of  unworthy  or 
incapable  traders  on  their  feet  long  after  they  ought 
to  have  been  turned  down. 

I  repeat,  therefore,  as  my  own  empirical  and  inde 
pendent  opinion,  that  the  probability  of  strong  banks 
advancing  funds  to  tide  such  banks  over  failure,  is 
extremely  dubious.  As  to  what  steps  they  may 
take,  one  possibility  can  be  inferred  from  the  action 
of  the  other  banks  in  giving  help  that  the  Federal 
Bank  might  wind  up  with  open  doors.  Another 
course  would  be  to  let  the  involved  bank  go  down  in 
unqualified  failure,  as  the  Commercial  Bank  of  Mani 
toba  was  allowed  to  go.  When  the  condition  of  a 
badly  managed  or  unprosperous  bank  is  tolerably 
understood  by  the  public,  this  course  is  the  most 
convenient;  the  public  forewarned  are  forearmed, 
and  no  panic  whatever  follows  the  failure.  A  third 
course  would  affect  only  the  bank  in  trouble  and 
some  one  of  the  others.  The  trouble  might  be  so  far 
anticipated  that  the  shareholders  could  agree  to 
reduce  the  nominal  value  of  their  stock  and  ratify 
proposals  for  amalgamation  with  another  bank.  By 
any  course  of  the  three,  the  number  of  banks  would 
be  reduced. 


Bank  Inspection  and  the  Depositor  435 

§  60.  —  BANK    INSPECTION    AND    THE    DEPOSITOR 

I.  According  to  the  opinion  of  Canadian  legisla 
tors,  as  implied  in  the  Bank  Act,  the  depositor  with 
a  chartered  bank  is  a  person  capable  of  looking  out 
for  himself.  There  is  no  requirement  of  a  fixed 
reserve  for  his  protection,  no  government  inspection. 
The  reasons  for  the  latter  omission,  if  such  one 
chooses  to  call  it,  have  already  been  detailed.  They 
may  be  summarized  here  as  (a)  the  impracticability 
of  efficient  government  inspection  where  banks  are 
as  complex  and  their  business  as  widespread  as  under 
the  Canadian  system,  and  (b)  the  provision  for  in 
spection  already  adopted  by  the  banks  themselves. 

Inspection  is  an  integral  part  of  a  Canadian  bank's 
administrative  routine,  the  need  for  which  has  been 
proved  in  a  negative  way  by  the  experience  of  banks 
who  have  neglected  it.  Looked  at  from  another  side, 
it  is  essential  to  sound  management  upon  a  full 
knowledge  of  a  bank's  liabilities,  assets  and  circum 
stances.  A  bank  with  a  number  of  branches  usually 
employs  at  least  one  officer  exclusively  for  the  service 
of  inspection.  In  the  larger  banks  he  ranks  third  in 
the  hierarchy,  coming  next  to  the  assistant  general 
manager  or  assistant  cashier,  reports  to  the  general 
manager  or  cashier,  and  is  under  his  direction.  It  is 
the  duty  of  the  inspector,  with  his  assistants  (who  in 
some  banks  may  be  three  or  four  in  number),  to  make 
the  round  of  the  branches  each  year,  or  oftener,  if 
possible,  to  pass  upon  the  value  and  character  of  the 
commercial  paper  and  other  negotiable  securities 
composing  the  banking  assets  of  the  offices,  to  check 
over  the  books  and  otherwise  to  verify  accounts,  to 
inquire  into  the  general  working,  prospects  and  busi- 


436  The  Canadian  Banking  System,  1817-1890 

ness  of  the  several  branches,  and  to  furnish  detailed 
statements  of  his  findings,  criticisms  and  recommen 
dations  to  the  general  manager. 

The  general  manager  has  his  own  opinion,  he  has 
information  as  complete  as  they  can  make  it  from 
branch  managers;  he  needs  the  result  of  the  in 
spector's  observations  as  to  the  value  and  character 
of  his  bank's  assets,  and  it  is  given  him  with  fullness, 
courage  and  independence.  By  comparing  the  three 
views,  the  general  manager  has  a  proper  basis  for 
deciding  the  policy  he  will  pursue,  the  provision  for 
bad  debts  he  will  recommend,  and  the  curtailment  or 
extension  of  the  operations  of  the  respective  branches. 
The  inspector,  as  his  rank  indicates,  must  be  a  banker 
of  the  first  class.  In  order  to  the  just  appraisal  of 
the  bank's  loans,  his  experience  must  be  wide  and 
his  judgment  trustworthy.  When  the  inspection 
staff  is  large,  the  work  of  the  chief  inspector  and  his 
assistant  is  confined  to  this  problem,  and  the  equally 
difficult  task  of  reporting  on  the  general  policy,  pros 
pects  and  position  of  the  branches.  Counting  cash 
and  checking  books  is  left  to  the  routine  inspector 
and  the  inspection  clerks. 

There  is  an  obvious  propriety  in  the  inspector's  re 
porting  to  the  chief  administrative  officer  of  the  bank, 
rather  than  to  the  president  or  board  of  directors. 
Should  he  report  to  them,  the  strained  relations  likely 
to  arise  between  manager  and  board  or  manager  and 
inspector,  would  be  intolerable.  Then,  too,  the  data 
obtained  by  inspection  are  essential  to  the  manage 
ment  of  the  bank  rather  than  to  the  supervision 
exercised  by  the  advisory  committee  of  shareholders. 
Cases  of  collusion  between  a  general  manager  and 
an  inspector  are  rare.  The  latter  is  always  a  banker 


Bank  Inspection  and  the  Depositor  437 

who  has  his  own  ends,  reputation  and  future.  He 
would  not  gain  by  stultifying  himself.  If  the  bank 
should  fail,  the  facts  would  be  certain  to  leak  out. 
His  name  would  be  tarnished;  his  career  ruined. 
Besides,  the  public  are  critical.  They  have  seen  and 
learned  that  in  the  long  run  a  bank  which  fails,  fails 
because  of  bad  debts.  They  have  also  come  to  believe 
that  efficient  inspection  is  the  only  possible  means  for 
a  bank  promptly  to  acquire  knowledge  of  its  bad 
debts  and  provide  for  them  in  time.  The  public  will 
gossip  of  a  bank  as  of  a  woman.  If  its  inspector  is 
a  weak  man,  of  slight  ability  or  bad  character,  un 
scrupulous,  a  mere  clerk,  connected  by  family  ties 
with  the  general  manager,  or  otherwise  likely  to  be 
too  close  to  him,  the  public  will  say  "there's  no  inspec 
tion  whatever  of  that  bank,"  and  act  accordingly. 

So  the  depositor,  if  he  chooses  to  seek  it,  can  still 
have  the  security  of  inspection,  not,  to  be  sure,  car 
ried  on  for  his  special  protection,  but  of  an  inspection 
more  expensive,  thorough  and  capable  than  the  work 
of  government  officials  well  could  be.  He  enjoys,  it 
is  true,  no  preferred  claim  upon  the  assets  of  an 
insolvent  debtor,  even  though  his  deposit  bear  no 
interest.  Indeed,  three  classes  of  creditors — note 
holders,  the  Dominion  government  and  the  provin 
cial  governments— must  be  paid  in  full  before  he  gets 
a  cent.  The  real  security  of  the  depositor  is  found 
in  the  large  capitals  and  reserve  funds  of  the  banks, 
their  prudent,  careful  management,  the  double  lia 
bility  of  shareholders  and  the  personal  joint  and 
unlimited  liability  of  directors  guilty  of  violating 
provisions  of  the  Bank  Act.  It  has  been  argued  that, 
taking  the  system  as  a  whole,  shareholders  must  lose 
$63,000,000  of  subscribed  capital,  $63,000,000  more  of 


438  The  Canadian  Banking  System,  1817-1890 

double  liability  and  $27,000,000  of  rest,  $193,000,000 
in  all,  before  depositors  can  lose  on  their  claims  for 
$174,000,000. 1  The  security  afforded  depositors  by 
individual  banks  is  more  or  less  than  the  average 
indicated  by  these  figures;  but  it  is  high  in  every 
case.  The  experience  of  twenty-seven  years  with 
failed  banks  shows  that  where  depositors  and  all 
other  creditors  have  lost  one  dollar,  shareholders 
have  lost  twelve. 

To  guide  his  choice  of  a  bank,  the  depositor  has  the 
information  obtainable  from  the  monthly  bank  state 
ment,  the  common  reputation  of  the  different  corpo 
rations,  the  general  opinion  passed  upon  their  officers 
and  the  criticisms  of  newspapers  and  financial 
journals.  If  through  ignorance  or  excessive  timidity 
he  is  inclined  to  distrust  his  judgment,  the  govern 
ment  is  always  ready  to  borrow  his  money  through 
the  post-office  or  government  savings  banks,  and  to 
pay  at  least  the  current  rate  of  interest  on  time 
deposits.  Well  informed  persons,  however,  especially 
those  to  whom  time  and  the  constant  availability  of 
their  funds  are  considerations,  object  to  the  inconven 
ient  restrictions  and  red  tape  apparently  necessary 
to  deposits  in  and  withdrawals  from  the  government 
banks,  and  prefer  to  leave  their  money  with  the 
chartered  banks.2 

1B.  E.  Walker,  "Canadian  Banking,"  Journal  of  tlie  Canadian 
Bankers'  Association,  vol.  i,  p.  20. 

2Still,  the  balances  due  by  all  the  government  banks  have  risen, 
almost  steadily,  from  $5,230,733  on  the  30th  June,  1872,  to  $43,036,- 
630  on  the  30th  June,  1894.  (Public  Accounts,  Canada,  1893,  p.  76, 
and  Canada  Gazette,  vol.  xxviii,  pp.  302,  303.)  Twenty-five  millions 
($25,257,868):of  this  was  owed  by  the  post-office  banks  and  $15,803,209 
by  the  government  savings  banks,  the  latter  being  mostly  in  the 
maritime  provinces.  The  funds  thus  obtained  are  not  immediately 
invested  in  securities,  as  they  are  in  Great  Britain.  The  govern- 


13 ank  Inspection  and  the  Depositor  439 

If  the  depositor  will  agree  to  leave  his  money  with 
the  bank  for  a  specified  time,  or  not  to  withdraw  it 
without  giving  notice,  usually  of  ten  or  fifteen  days, 
the  chartered  bank  will  pay  him  an  interest,  the  cur 
rent  rate  now  being  3  to  3^  per  cent.  The  higher 
current  rate  is  paid  when  the  period  is  one  of  three 
to  six  months,  or  when  thirty  or  sixty  days'  notice 
of  withdrawal  is  agreed  upon. 

Deposits  of  this  class  figure  in  the  return  as  "de 
posits  made  by  the  public,  payable  after  notice  or  on 
a  fixed  day."  Their  large  amount,  $109,924,925  on 
the  30th  June,  1894,  well  indicates  the  efficiency  of 
the  Canadian  system  in  gathering  up  the  spare  cash 
of  the  people  and  in  quickening  the  flow  of  capital 
disbursed  among  laborers,  farmers,  artisans  and 
others,  back  to  the  channels  of  commerce.  It  must 
be  remembered  that  the  sum  is  almost  entirely  of 
Canadian  contribution.  The  discount  rate  has  long 
been  so  low  in  Canada  as  to  preclude  the  profitable 
employment  of  British  funds  bearing  the  interest 
which  other  colonial  banks  are  able  to  offer.  Cana 
dian  banks,  therefore,  have  not  developed  a  British 
business;  their  foreign  liabilities  chiefly  arise  from 
transactions  in  exchange.  Interest  bearing  deposits 
are  regarded  by  the  Canadian  depositors  in  the  light 
of  investments;  by  the  banks,  as  among  the  most 
satisfactory  and  least  troublesome  of  their  liabilities. 
They  are  evidenced  either  by  deposit  receipts,  or, 
when  made,  through  "  Savings  Bank  Departments," 
by  entries  in  the  pass-book  of  the  creditor.  As  in 

ment  acts  more  as  a  borrower  than  as  a  trustee.  Deposits  made  with 
its  banks  pass  into  the  Consolidated  Revenue  Fund,  and  interest 
and  withdrawals  are  a  charge  upon  the  revenue.  Both  items  appear 
in  the  Budget. 


440  The  Canadian  Banking  System,  1817-1890 

other  countries,  the  notice  of  withdrawals  required 
from  depositors  of  the  latter  sort  is  designed  to  pro 
tect  the  bank  at  critical  times;  ordinarily  the  money 
is  paid  over  as  soon  as  the  depositor  signifies  his  wish 
for  it.  The  more  permanent  character  of  such  de 
posits  lies  in  the  intentions  of  the  makers  rather  than 
in  the  practical  conditions  of  their  withdrawal. 

The  person  who  wishes  to  retain  complete  control 
over  his  moneys  deposits  them  on  demand.  Compe 
tition  formerly  led  the  banks  to  pay  interest  on  the 
balances  of  active  current  accounts.  Now,  however, 
the  custom  is  nearly  obsolete  among  well  managed 
banks.  •  In  rare  cases,  when  the  balance  of  the 
depositor  is  large,  has  a  permanent  character,  or  pro 
motes,  as  an  account,  important  incidental  advan 
tages,  the  bank  may  still  allow  an  interest.  Aside 
from  the  convenience  of  making  payments  through 
the  bank  and  the  security  of  funds  left  with  it,  the 
depositor  on  demand  generally  expects  to  derive 
certain  other  benefits  from  the  bank  in  his  relation 
to  it  as  a  borrower.  He  cannot,  therefore,  exact  so 
much  as  the  customer  who  merely  expects  the  bank 
to  hold  his  savings  safe,  and  to  whom  interest  is  paid, 
partly  as  a  just  compensation  for  the  use  of  his 
money,  partly  as  a  means  to  the  important  economic 
end  of  utilizing  all  the  available  capital  of  the  com 
munity  in  the  operations  of  trade  and  industry. 


§61. THE  SHAREHOLDER  AND  BORROWER  OF   THE 

CANADIAN  BANK 

I.  As  guarantors  of  its  liabilities,  the  shareholders 
of  a  bank  are  liable  not  only  for  the  amount  of  their 
subscriptions  to  stock,  but  also  for  an  equal  amount 
in  addition.  The  very  fact  that  close  to  five-sevenths 


Shareholder  and  Borrower  of  the  Canadian  Bank      441 

of  the  total  resources  of  Canadian  banks  are  derived 
from  sources  other  than  their  proprietors,  makes 
patent  the  necessity  for  some  such  guarantee.  Vari 
ous  precautions  are  established  by  the  Bank  Act  in 
order  that  the  liability  of  shareholders  shall  be  real 
and  available.  A  new  bank  may  not  start  without 
giving  substantial  evidence  of  a  capital  foundation 
contributed  bond  fide.  Subscribers  refusing  or  ne 
glecting  to  pay  calls  made  by  directors,  forfeit  ten 
per  cent,  of  their  shares;  they  may  not  vote  at  meet 
ings  while  calls,  then  due  by  them,  are  still  unpaid; 
calls  may  be  enforced  by  suit;  or  sufficient  of  the 
holders'  stock  may  be  sold  to  provide  the  amount 
necessary,  after  deduction  of  expenses  and  penalties, 
to  pay  up  their  remaining  shares.  The  provisions 
for  promptly  enforcing  the  double  liability  include, 
among  others,  entire  forfeiture  of  claims  to  dividends 
on  refusal  to  pay  calls,  the  recovery  of  calls  by  suit, 
and  the  continued  liability  of  the  transferor  on  shares 
the  -  transfer  of  which  shall  have  been  registered 
within  sixty  days  of  the  bank'js  suspension  of  pay 
ment.  A  further  safeguard,  effective  chiefly  as  an 
exhibit  of  the  character  of  each  bank's  proprietary 
and  the  changes  occurring  therein,  is  the  requirement 
of  an  annual  return  to  the  government  of  the  names 
of  the  shareholders  of  each  bank,  their  places  of  resi 
dence  and  the  amount  of  stock  held  by  each. 

Other  clauses  of  the  act,  dealing  with  the  trans 
mission  of  shares,  declare  no  transfer  valid  unless 
registered,  and  accepted  by  the  person  to  whom  it  is 
made,  nor  unless  the  person  making  the  transfer,  if 
so  required  by  the  bank,  has  discharged  his  debts  to 
the  bank  exceeding  the  value,  at  the  current  rate,  of 
the  remaining  stock  belonging  to  him.  The  bank 


4 »  . 


442  The  Canadian  Banking  System,  1817-1890 

has  a  prior  lien  on  shares  of  persons  indebted  to  it,  a 
security  on  which  it  must  realize  by  selling  the  stock 
within  twelve  months  after  the  debt  becomes  due 
and  default  occurs  in  payment.  Partly,  it  is  sup 
posed,  to  prevent  speculation  in  shares,  no  contract 
to  transfer  shares  is  valid  unless  the  person  making 
the  transfer  is  the  registered  owner  of  the  shares,  or 
has  the  owner's  consent  to  the  sale  and  specifies  the 
distinguishing  numbers,1  if  any,  of  the  shares  trans 
ferred.  *  *  *  Under  these  and  a  number  of  other 
restrictions  for  the  most  part  only  of  technical  legal 
interest,  his  position  as  a  guarantor  and  the  liabilities 
of  the  shareholder  are  fixed  and  certain;  if  he  have 
visible  wealth  other  than  his  stock,  they  are  practi 
cally  inevitable. 

As  a  proprietor,  or  rather  as  an  investor,  his  posi 
tion  is  not  always  so  certain.  Buying  or  subscribing 
to  bank  stock  is  a  business  venture,  subject  to  the 
business  risk.  The  profit  from  the  investment  de 
pends,  more  or  less,  upon  the  sagacity  and  prudence 
with  which  the  risk  is  placed.  Passages  in  the  his 
torical  chapters  of  this  investigation  have  shown  how, 
in  former  years,  shareholders  have  borne  well  nigh 
the  whole  burden  of  loss  caused  by  careless,  unsound, 
dishonest  or  imprudent  banking,  a  loss  that  can  be 
estimated  at  nothing  less  than  $23,000,000  in  twenty- 
seven  years.  What  has  happened  will  happen  here 
after.  The  first  purpose  of  successive  improvements 
in  Bank  Acts  must  be  to  minimize  injury  to  bank 
creditors,  rather  than  to  bank  proprietors.  Still, 
Canadians  frequently  remark  that  faults  in  banking 
management  are  fewer  now  than  they  were  in  earlier 
years,  or  that  the  business  is  conducted  on  safer  lines 

alt  is  not  the  custom  of  Canadian  banks  to  number  their  shares. 


Shareholder  and  Borrower  of  the  Canadian  Bank      443 

than  ever  before,  and  they  believe  that  the  future 
will  bring  further  improvement.  Evils  have  never 
been  more  than  sporadic.  A  number  of  banks  have 
enjoyed  a  steady  growth  from  the  time  they  were 
started;  in  bad  times  they  have,  perhaps,  slightly 
reduced  their  dividends,  but  they  have  always  been 
able  to  provide  for  losses  from  the  balance  at  credit 
of  profit  and  loss.  A  number  of  others,  not  quite  so 
fortunate,  while  obliged  to  trench  upon  reserve  funds, 
have  never  had  their  capital  stock  reduced  and  have 
never  passed  their  dividends. 

If  his  choice  is  judicious,  the  bank  investor  can 
find  plenty  of  stocks  on  which  the  payment  of  the 
semi-annual  dividend  is  as  nearly  sure  as  commercial 
ventures  well  can  be,  and  from  which  he  is  likely  to 
gain  in  the  added  value,  "the  unearned  increment" 
usually  accruing  to  the  stock  of  a  well  managed 
bank,  as  it  grows  older  and  shares  in  the  advancing 
prosperity  of  its  customers.  In  1893-1894,  six  of  the 
banks  have  paid  dividends  of  6  per  cent.,  seven  of  7 
per  cent.,  two  of  7^  per  cent.,  nine  of  8  per  cent.,  two 
of  10  per  cent,  and  two  of  12  per  cent.  The  dividends 
paid  by  the  principal  banks  in  the  last  four  years 
appear  in  Appendix  II. 

Partly  to  protect  the  shareholders  from  fluctuations 
in  the  rate  of  dividends,  it  is  provided  by  the  Bank 
Act  that  no  division  of  profits  exceeding  8  per  cent, 
per  annum  of  the  capital  stock  shall  be  declared 
until  the  rest  or  reserve  fund  ("surplus"  in  the 
United  States)  shall  equal  30  per  cent,  of  the  paid-up 
capital  of  the  bank.  By  avoiding  changes  in  the 
dividend  rate,  this  accumulation  of  earned  profits 
left  with  the  bank  also  tends  to  minimize  the  fluctu 
ation  in  the  value  of  shares  that  stimulates  specula- 


444  The  Canadian  Banking  System,  1817-1890 

tion.  Canadian  bankers  think  it  desirable  to  have 
their  stock  held  by  investors  bond  fide,  and  for  years 
some  of  them  have  congratulated  their  shareholders 
upon  the  diminution  of  speculative  holdings.1  It  is 
hardly  necessary  to  add  that  the  rest  furnishes  an 
additional  guarantee  to  the  creditors  of  a  bank; 
while  undivided  it  is  strictly  "corporate  property;  its 
existence  nowise  diminishes  the  liability  of  stock 
holders,  although  it  does  furnish  them  with  a  sub 
stantial  protection  against  the  possibility  of  being 
called  on  for  further  contribution s. 

As  a  matter  of  fact,  rests  are  much  larger  in  many 
instances  than  the  proportion  mentioned  in  the  Bank 
Act.  Any  addition  to  the  fund  is  ordinarily  reflected 
in  the  price  of  the  stock,  for  the  rest  increases  the  earn 
ing  power  of  the  bank  which  holds  it.  It  costs  neither 
dividends  nor  interest,  and  most  managers  and  pro 
prietors  believe  that  higher  returns  are  obtained 
from  profits  thus  undistributed  than  could  be  secured 
by  proprietors  if  the  fund  were  divided  among  them. 
The  Bank  of  New  Brunswick,  therefore,  has  accum 
ulated  a  rest  of  105  per  cent,  and  pays  a  12  per 
cent,  dividend;  the  Dominion  Bank  has  one  of  100 
per  cent,  of  its  capital  and  pays  12  per  cent.;  the 
Bank  of  Nova  Scotia  one  of  80  per  cent,  and  pays  8 
per  cent.;  the  Bank  of  Toronto  one  of  90  per  cent,  and 
pays  10  per  cent.  The  Imperial  Bank,  the  Bank  of 
Hamilton,  Standard  Bank,  Bank  of  Ottawa,  Bank  of 
Montreal,  Banque  du  Peuple,  Molsons'  Bank,  Mer- 

:In  the  small  number  of  transactions  in  shares  indicated  by  the 
market  reports,  it  is  possible  to  see  how  completely,  at  the  present 
day,  bank  stock  has  passed  into  the  hands  of  permanent  holders. 
There  is  no  better  or  stronger  evidence  of  the  confidence  placed 
by  the  public  in  the  solidity  of  the  banks  than  its  appreciation  of 
bank  shares  as  investments. 


Shareholder  and  Borrower  of  the  Canadian  Bank      445 

chants'  Bank  of  Halifax,  Merchants'  Bank  of  Canada, 
Halifax  Banking  Company  and  the  People's  Bank 
have  each  a  rest  equal  to  50  per  cent,  or  more  of  their 
paid-up  stocks. 

Too  seriously  to  emphasize  the  liabilities  of  share 
holders  in  the  Canadian  banks  will  be  to  make  a  grave 
mistake.  Investors,  no  doubt,  take  a  certain  account 
of  the  liability,  but  in  respect  to  eleven-twelfths,  at 
least,  of  the  subscribed  banking  capital  of  the  Domin 
ion,  the  probability  of  occasion  arising  for  its  en 
forcement  is  so  remote,  so  slight,  that  the  liability  is 
practically  disregarded.  The  stock  in  well  managed 
banks  is  esteemed  one  of  the  safest  and  best  com 
mercial  investments  in  Canada.  Stocks  yield  to  the 
buyer  from  4  to  6  per  cent,  on  the  market  value  of 
his  purchase.  It  may  be  worth  while  to  note  that 
the  lowest  yield  is  usually  obtained  from  stocks  com 
manding  the  highest  premium.  The  accumulation 
of  a  rest  makes  property  in  a  bank  somewhat  more 
secure,  and  the  firm  establishment  of  banks  which 
have  been  able  to  acquire  large  rests  rather  improves 
the  prospects  of  regular  and  uniform  or  gradually 
rising  dividends.  Other  factors  in  the  market  esti 
mate  of  a  stock  are  that  growth  of  a  bank's  good 
will,  the  increase  of  its  credit  and  the  formation  of  a 
clientele — for  all  of  which  time  and  good  manage 
ment  are  necessary. 

These  considerations  make  shares  in  particular 
banks  especially  desirable  investments,  and  help  to 
raise  their  price,  even  considerably  above  the  point 
at  which  the  rest  would  be  fully  provided  for  in  the 
value  of  the  stock,  or  at  which  the  yield  to  the 
investor  would  be  as  high  as  from  the  stock  of  banks 
less  favorably  situated.  Shareholders  exclusively 


446  The  Canadian  Banking  System,  1817-1890 

get  the  benefit  of  any  such  increment  of  value  accru 
ing  during  the  period  of  their  proprietary.  To  realize 
it,  either  they  may  sell  their  holdings,  or  in  case  it  is 
decided  to  increase  the  capital  of  the  bank,  they  may 
sell  the  new  shares  allotted  to  them.  It  is  provided 
by  the  Bank  Act  that  bank  directors  shall  not  require 
from  holders  to  whom  allotments  are  made,  a  rate  of 
premium  on  new  shares  exceeding  the  percentage 
then  borne  by  the  rest  of  the  bank  to  its  capital 
stock.  The  holder  gains  the  difference  between  this 
price  and  the  higher  market  price. 

II.  The  position  of  the  borrower  has  received  some 
attention  in  the  discussion  of  large  banks,  branch 
banking  and  the  Canadian  system  of  issue.  I  have 
pointed  out  there  the  wide  and  thorough  distribution 
of  banking  facilities,  the  equalization  of  discount 
rates,  the  avoidance  of  periodical  fluctuations  in  the 
cost  of  loans,  and  the  extensive  control  of  funds 
exercised  by  the  Canadian  banks  wherever  their 
establishments  are  in  operation.  A  consequence  of 
this  control,  which  has  also  been  previously  noted,  is 
the  ability  of  each  bank  to  supply  whatever  may  be 
judged  the  needs  of  its  own  customers,  and  to  enforce 
the  rule  of  "one  customer,  one  bank." 

The  natural,  desirable  and  usual  corollary  to  this 
rule  is  the  establishment  of  confidential  relations  by 
the  borrower  with  his  banker,  as  a  condition  prece 
dent  to  any  advance.  The  borrower  lays  before  the 
banker  the  state  of  his  business,  usually  by  means  of 
an  actual  balance  sheet;  he  explains  to  the  banker 
the  purpose  for  which  the  advance  is  required,  and 
gives  such  general  information  as  to  his  prospects, 
condition  and  business  as  can  assist  the  lender  in 
judging  as  to  the  expediency  of  granting  the  amount 


Shareholder  and  Borrower  of  the  Canadian  Bank      447 

asked  for,  the  sincerity  of  the  borrower's  explana 
tions  and  the  probable  productivity  of  the  advance. 
As  a  rule,  the  discussion  of  the  balance  sheet  is 
required  each  year,  and  the  banker  sets  a  limit  or 
"  grants  a  line  of  credit  "  up  to  which  he  agrees  to 
supply  the  borrower  as  needs  arise  in  the  course  of 
his  season's  operations.  The  general  possibilities  of 
the  mentorship,  the  restraint  on  speculation  and  the 
check  on  over-expansion  which  can  be  exercised  by 
cautious,  far-seeing  and  sagacious  men  as  bank 
managers  under  such  conditions,  have  been  reasoned 
out  to  the  conclusion  that  the  country  in  which  they 
are  thoroughly  realized  will  enjoy  practical  immunity 
from  commercial  crises.1  The  experience  of  Scotland 
for  a  long  period  of  years,  and  of  Canada  since  1879, 
would  seem  to  confirm  the  writer's  views.  At  any 
rate  bankers  do  not  so  often  discover  that  they  "  have 
unwittingly  been  booming  a  corner  lot,  building  a 
mill  or  helping  to  float  a  company."2 

As  the  Canadian  corporations  are  predominantly 
commercial  and  industrial  banks,  we  may  disregard, 
for  the  present,  loans  made  on  the  security  of  bonds 
and  stocks,  temporary  and  unsecured  advances  to 
persons  of  great  wealth  and  high  credit,  and  occa 
sional  supplies  to  shareholders  merely,  e.  g.,  on  unin- 
dorsed  promissory  notes. 

Borrowers  in  general,  whose  purposes  are  approved 
by  the  banks,  seek  advances  to  anticipate  returns 
from  sales  of  commodities  already  concluded,  to 
make,  to  move  or  to  carry  commodities  for  the  pur- 

*Cf.  Somers,  "The  Scotch  Banks  and  System  of  Issue,"  pp.  113- 
114,  on  Scotland's  escape  from  crises. 

9B.  E.  Walker,  "Canadian  Banking,"  Journal  of  the  Canadian 
Bankers'  Association,  vol.  i,  p.  22. 


448  The  Canadian  Banking  System,  1817-1890 

pose  of  selling  them.  In  other  words,  banks  as  a 
rule  will  extend  credit  only  when  there  is  a  prospect 
that  the  use  of  the  advance  will  provide  the  means 
for  its  payment.  Otherwise  they  incur  losses  and 
lock-ups.  It  is  further  a  well  established  principle 
of  Canadian  practice  that  advances  shall  be  secured. 

Those  who  borrow  to  anticipate  returns  from  con 
cluded  sales  are  technically  the  discount  customers 
of  the  banks.  The  security  they  give  is  the  two- 
name  paper  purchased  by  the  bank,  i.  e.,  promissory 
notes  indorsed  by  the  payee,  time  acceptances  of 
debtors  for  which  the  drawee  is  still  liable,  or  indorsed 
bills  of  exchange.  The  bank  thus  has  two  guaran 
tors  of  repayment,  the  one  directly  liable,  the  other 
by  way  of  recourse;  and  both  commercial  houses  who 
must  meet  such  obligations  in  order  to  preserve  their 
solvency.  Another  class  of  discount  customers  are 
farmers,  who  usually  borrow  on  their  promissory 
notes,  indorsed  by  one  or  more  of  their  neighbors. 

Persons  making  commodities  for  sale  are  usually 
expected  to  secure  the  banks  which  assist  them  in  the 
method  provided  by  those  clauses  of  the  Bank  Act 
of  1890  which  relate  to  the  security  given  by  whole 
sale  manufacturers,  millers,  distillers,  packers, 
etc.  (Vide  §52.)  The  security  given  by  those 
engaged  in  shipping  goods  to  market  or  holding 
them  for  the  purpose  of  sale,  is  likewise,  in  many 
cases,  the  material  security  of  valuable  goods,  and 
the  rules  for  its  assignment  are  provided  by  the 
Bank  Act  in  the  clauses  dealing  with  warehouse 
receipts,  bills  of  lading,  specifications  of  timber  and 
the  like.  Under  the  same  category  (of  persons  car 
rying  goods  with  intent  to  sell  them),  come  many 
wholesale  houses,  importers,  exporters,  dealers  in 


Shareholder  and  Borrower  of  the  Canadian  Bank      449 

general  merchandise  and  a  large  variety  of  retail 
traders.  It  is  usually  necessary  to  give  the  bank 
collateral  security,  if  it  exists,  but  where  no  collateral 
is  at  hand,  the  borrower,  according  to  the  best  prac 
tice,  is  required  to  furnish  the  bond  of  other  respon 
sible  parties,  to  secure  the  repayment  of  his  banker. 
In  their  essence,  all  the  transactions  mentioned  in 
the  paragraph  are  loans,  but  in  form  they, frequently 
appear  as  discounts.  Canadian  bankers  prefer  to 
make  advances  on  negotiable  instruments,  rather 
than  overdrafts,  even  though  the  promissory  note 
taken  from  the  customer  for  loans  is  nothing  more 
than  an  evidence  of  the  bank's  claims. 

The  rule  as  to  renewals  no  longer  shows  the  same 
simplicity  as  when  Upper  Canada  was  a  separately 
governed  province.  Whether  a  renewal  is  permitted 
now  depends  upon  the  purpose  for  which  the  advance 
was  made  and  the  pertinent  circumstances.  Produce 
buyers  and  grain  shippers  or  others  for  whom  the 
season  of  operations  and  sales  is  brief,  would  hardly 
be  allowed  renewals. 

Customers  obtaining  the  discount  of  paper  payable 
at  places  other  than  the  place  of  discount,  are  subject 
to  an  additional  charge  for  the  expenses  of  agency 
and  collection  not  exceeding  one -half  of  one  per  cent., 
when  the  paper  is  payable  at  the  office  of  a  bank 
other  than  the  one  discounting.  When  the  paper  is 
payable  at  another  office  of  the  same  bank,  the 
charge  permitted  by  the  Bank  Act,  which  may  not 
exceed  one-half  of  one  per  cent,  for  paper  payable  in 
ninety  days  or  over,  is  proportionally  less  for  shorter 
term  advances.  These  provisions,  intended  to  assure 
to  banks  in  certain  cases  somewhat  more  than  the 
interest  at  seven  per  cent,  per  annum  they  are  per- 
29 


450  The  Canadian  Banking  System,  1817-1890 

mitted  to  deduct  at  the  time  of  discounting  or  recover 
by  suit,  are  not  of  particular  importance  under  the 
ruling  conditions.  The  rate  of  discount  on  first-class 
commercial  paper  does  not  usually  exceed  6 1  per  cent, 
in  any  part  of  Canada  except  British  Columbia. 

The  borrower  whose  account  is  "valuable"  is  likely 
to  secure  favorable  rates  on  the  additional  charges 
for  agency.  If,  for  example,  he  usually  keeps  a  large 
balance  at  his  credit,  if  he  receives  or  uses  a  large 
amount  of  exchange  in  his  business  and  sells  or  ob 
tains  it  through  his  bank,  or  if,  again,  he  uses  quan 
tities  of  bank  notes  in  his  disbursements,  the  bank 
which  has  the  account  can  afford  to  perform  services 
for  him  at  lower  rates  than  for  those  whose  custom 
opens  no  such  incidental  sources  of  profit.  He  is  likely 
to  be  accorded  somewhat  greater  facilities  in  the 
matter  of  loans.  What  extra  gain  the  banks  obtain 
in  one  way,  competition  generally  compels  them  to 
return  in  another. 

A  question  as  to  the  borrower's  position  which  we 
have  yet  to  examine,  is  the  treatment  he  receives 
from  his  bank  when  the  money  market  tightens,  the 
financial  horizon  becomes  obscured  and  every  one 
begins  to  prepare  for  trouble.  Is  the  borrower  allowed 
to  carry  through  the  undertakings  begun  on  an  under 
standing  as  to  loans  ?  Or  is  he  sacrificed  to  the  exi 
gencies  of  the  time  and  forced  to  realize  at  a  loss,  in 
order  to  pay  a  debt  ?  What  is  the  meaning  of  the 
banker's  proposal  "to  take  care  of  his  customers?" 
For  an  answer,  we  need  only  to  recall  the  spring  and 
summer  of  1893. 

In  the  first  half  of  that  year  many  an  agent  of  first 
rate  American  houses,  provided  with  unexceptionable 
securities,  offering  paper  at  all  the  way  from  8  to  14 


Shareholder  and  Sorrower  of  the  Canadian  Bank      451 

per  cent.,  and  promising  permanent  custom  if  imme 
diate  needs  were  supplied,  was  sent  away  begging 
from  one  Canadian  bank  to  another.  But  even  then 
Canadian  customers  of  these  banks  got  advances,  if 
they  needed  them  for  legitimate  purposes,  up  to  the 
full  amounts  of  their  credits,  and  at  rates  no  higher 
than  seven  per  cent.  The  banks  had  to  import  more 
than  $8,000,000  to  do  it,  they  had  to  reduce  their 
American  balances  at  a  time  when  the  reduction  was 
most  difficult  and  unprofitable,  they  lost  safe  chances 
for  high  though  temporary  profit,  but  they  were 
under  obligation  to  support  their  customers  and 
they  did  support  them.  Current  loans  were  increased 
by  over  eleven  millions  between  the  last  day  of  Jan 
uary  and  the  first  of  July,  although  between  the  last 
of  January  and  the  last  of  August,  barely  half  a  million 
was  added  to  circulation,  and  deposits  on  demand  were 
reduced  by  more  than  six  millions.  In  the  table  below 
appear  the  changes  occurring  in  the  significant  items 
of  the  bank  statement,  month  by  month,  from  Janu 
ary  to  December.1  Nothing  better  could  illustrate 


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1     *= 

1 

3 

3 
O 

Jan.. 
Feb.. 
Mar. 
Apr.. 
May. 
June 
July 
Aug. 
Sept.. 
Oct.. 
Nov.. 
Dec.. 

32,831 
32,978 
33,340 
32,633 
31,927 
33,483  i 
33,573  ! 
33,308 
35,128  1 
36,906 
35,120  i 
34,418 

$ 
67,459 
66,822 
64,536 
64,542 
64,859 
64,975 
64,563 
61,437 
61,245 
62,524 
62,926 
62,594  ! 

$ 

102,097 
103,140 
103,700 
104,216 
105,581 
105,841 
106,563 
105,015 
104,004 
103,577 
104,414 
107,785 

$    1    $ 
81  i  4,100 
87!  4,766 
127  6,412 
139  6,101 
163  5,504 
210  4,751 
124  4,600 
169  5,538 
221  5,312 
179  4,966 
131  4,419 
166  4,151 

19,695 
19,791 
17,857 
19,378 
19,230 
18,547 
19,205 
20,456 
20,214 
20,588 
20,630 
20,978 

21,626 
21,397 
20,539 
17,165 
17,814 
17,331 
15,616 
13,562 
13,451 
14,839 
16,242 
18,229 

S 
1,432 
1,159 
375 
2,324 
1,182 
1,587 
3,860 
3,364 
4,243 
3,918 
4,827 
3,540 

14,606 
14,264 
14,395 
14,306 
14,787 
14,786 
15,080 
15,377 
15,562 
15,446 
16,439 
16,573 

18,833 
19,456 
17,655 
16,469 
15,213 
14,880 
15,141 
14,398 
14,960 
14,681 
14,465 
14,236 

1 

197,256 
197,709 
204,903 
206,789 
207,685 
208,793 
206,937 
205,956 
204,654 
204,854 
201,996 
200,397 

452  The  Canadian  Banking  System,  1817-1890 

the  protection  enjoyed  by  the  worthy  customer  under 
the  Canadian  system  of  banking.  In  critical  periods 
his  accommodation  is  not  ruthlessly  curtailed,  nor 
the  price  of  it  excessively  augmented. 


§62. THE  BUSINESS  OF  CANADIAN  BANKS 

In  reviewing  the  important  or  interesting  facts 
relating  to  note  holders,  depositors  and  borrowers 
under  the  banking  system  of  Canada,  in  discussing 
reserves,  inspection  and  other  points,  many  of  the 
salient  features  of  the  miscellaneous  banking  busi 
ness  carried  on  with  the  Canadian  public  have  already 
been  more  or  less  fully  explained.  A  second  expla 
nation  in  this  connection  would  be  repetition  from  a 
different  point  of  view  rather  than  the  formulation 
of  new  material.  The  proportions  of  various  items 
in  their  assets  and  liabilities  to  their  capital  stocks, 
and  sundry  other  facts  respecting  the  several  banks, 
appear  in  Appendix  II. 

Aside,  however,  from  those  commonly  denoted  by 
discount,  deposit  and  issue,  the  business  of  the  Cana 
dian  banks  includes  other  types  of  transactions.  The 
Canadian  chartered  banks  perform  nearly  every 
variety  of  the  mercantile  banking  services  required 
wherever  there  is  sufficient  business  to  support  an 
agency  or  branch.  Quite  all  the  trade  they  do  not 
enjoy.  In  collecting  deposits,  e.  g.,  they  have  as 
competitors  both  the  government  savings  banks  and 
the  loan,  mortgage  and  investment  companies,  as 
well  as  some  building  societies — the  latter  being 
corporations  that  loan  money  on  real  estate — most  of 
whom  receive  deposits  at  interest.  There  are  also  a 
number  of  private  bankers  who  receive  deposits, 


The,  Business  of  Canadian  Banks  453 

conduct  a  loaning  business  in  places  where  no  char 
tered  bank  is  established,  and  frequently  place  money 
elsewhere,  in  such  amounts  or  on  such  security  as 
would  make  the  transaction  unacceptable  to  a  char 
tered  bank. 

But  of  incorporated  savings  banks,  such  as  one  finds 
in  almost  any  American  city  of  twenty  thousand  in 
habitants,  there  are  not  more  tha^i  five  in  the  whole 
country.  With  two  exceptions  these  are  in  the  cities 
of  Montreal  and  Toronto.  "The  Savings  Bank  De 
partment"  usually  attached  to  the  branch  offices  of 
chartered  banks  forms  a  place  of  safety  for  the  spare 
earnings  of  the  people,  and  is  now  opened  in  many 
a  locality  where  a  mere  savings  bank  could  not  eke 
out  existence.  The  practice  of  banks  in  computing 
interest  upon  deposits  varies  in  different  parts  of  the 
Dominion;  in  some  districts  interest  is  paid  from  the 
day  of  deposit  to  the  day  of  withdrawal;  in  others, 
it  is  computed  on  the  minimum  monthly  balance, 
though  when  this  is  the  case  the  rate  allowed  is  often 
somewhat  higher  than  when  interest  is  paid  on  the 
daily  balance.  What  proportion  the  mass  of  small 
accumulations  thus  acquired  and  eventually  devoted 
to  productive  purposes,  bears  to  the  total  deposits  at 
interest  with  the  chartered  banks,  there  are  no  offi 
cial  statistics  to  indicate. 

In  addition  to  Canadian  collections  and  transactions 
in  domestic  exchange,  many  of  the  banks  undertake  - 
the  negotiation  of  municipal  debentures,  city  bonds, 
and  occasionally  provincial  securities.  They  do  not 
act  as  brokers,  but  buy  the  securities  outright,  after 
the  manner  of  specialized  bond  dealers  in  the  United 
States.  Some  banks  issue  commercial  credits  availa- 
able  in  whatever  parts  of  the  world  the  importers 


454          The  Canadian  Banking  System,  1817-1890 

and  traders  among  their  customers  are  likely  to 
require  funds.  They  also  issue  travelers'  credits 
and  circular  notes,  these  also  being  available  in  any 
part  of  the  world  with  which  a  banking  correspond 
ence  can  be  established.  Not  all  the  Canadian  banks 
engage  in  this  class  of  business;  not  all  the  banks  are 
examples  of  what  may  be  termed  the  Canadian  type. 
There  are  still  some  banks,  ten  in  all,  perhaps,  whose 
interests  are  at  most  but  sectional,  and  whose  busi 
ness  is  chiefly  confined  to  discount,  deposit,  issue  and 
such  transactions  in  domestic  exchange  as  may  be 
required  within  the  sections  where  the  banks  work. 
The  typical  Canadian  bank,  however,  is  a  corporation 
controlled  from  one  of  the  centers  and  capitalized 
for  a  million  or  more,  which,  has  its  branches  at  a 
number  of  points  in  one  or  more  provinces,  its  corres 
pondents  in  London,  England,  in  numerous  cities  of 
the  United  States,  and  at  different  European  and 
Oriental  marts,  and  consequently  the  facilities  for 
practically  any  kind  of  safe  transaction  that  may  be 
offered  it. 

Four  of  the  banks  have  agencies  of  their  own  in 
the  city  of  New  York,  one  a  branch  at  Chicago, 
another  an  agency  there  as  well  as  at  Kingston, 
Jamaica,  and  another  still,  branches  in  San  Francisco, 
Portland,  Tacoma  and  Seattle.1  With  the  exception 
of  the  agencies  in  New  York,  the  American  agents 
are  engaged  in  a  miscellaneous  banking  business, 
the  amount  of  which  cannot  be  inferred  from  the 
bank  statement,  because  the  parent  banks  are  required 

irThe  Bank  of  British  Columbia,  controlled,  like  the  Bank  of 
British  North  America,  by  a  Court  of  Directors  sitting  in  London- 
Both  are  institutions  acting  under  royal  charter,  but  subject  to  the 
regulation  of  the  Canadian  Parliament.  The  latter  bank  also  has 
an  agency  at  San  Francisco. 


The  Business  of  Canadian  Banks  455 

to  report  merely  the  balances  due  by  agents,  agencies 
or  other  banks  in  foreign  countries. 

New  York  city  is  used  by  all  the  larger  Canadian 
banks  as  a  place  to  keep  parts  of  their  reserves. 
When  the  bank  has  no  agency  of  its  own  there,  it  can 
arrange  with  some  local  bank  to  loan  its  moneys  at 
call,  or  it  can  get  a  certain  interest  by  depositing  a 
balance  with  one  of  the  local  banks.  The  balance 
may  then  be  used  as  a  basis  for  drawing  New  York 
exchange,  or  as  a  means  of  purchasing  needed  ster 
ling  exchange  when  the  New  York  market  is  more 
favorable  than  the  Canadian,  or  as  a  means  to  pur 
chase  specie  when  it  is  necessary  to  import  gold  to 
Canada.  Banks  which  had  their  own  establishments 
at  New  York  in  1873,  used  their  agents  for  the  em 
ployment  of  portions  of  their  funds  until  required  else 
where.  An  agent  employed  money  forming  part  of 
the  general  fund  reserved  by  his  bank  to  meet  shortly 
maturing  or  unexpected  liabilities,  partly  on  loans 
maturing  on  demand,  for  which  no  vouchers  were 
received  (call  loans  on  bonds  and  stocks),  and  partly 
in  loans  payable  at  specified  times,  for  which  he 
received  notes,  drafts  and  other  commercial  paper.1 
Even  then  the  Bank  of  British  North  America  and 
the  Bank  of  Montreal  had  long  been  two  of  the  "five 
great  names"  of  the  sterling  exchange  market. 

At  present  the  New  York  offices  very  seldom  loan 
on  time,  though  when  good  rates  are  offered  and  no 
funds  are  required,  either  in  Canada  or  abroad,  they 
are  willing  to  make  an  occasional  time  loan.  But 
their  principal  business  is  loaning  at  call  on  negotia 
ble  securities  to  stock  brokers  and  others,  the  pur 
chase  and  sale  of  sterling  exchange,  and  making 

lfThe  People,  ex  rel.,  Bank  of  British  North  America  r*.  Com'rs  of 
Taxes,  etc.  (1873),  New  York  Supreme  Court  Reports  (T.  and  C.),  p. 
630. 


456  The  Canadian  Banking  System,  1817-1890 

transfers  of  money  by  cable.  Their  British  corres 
pondents,  in  two  cases,  may  be  their  own  London 
offices,  but  both  for  these  and  the  other  banks  are 
usually  such  institutions  as  the  Clydesdale  Bank, 
Limited,  the  Bank  of  Scotland,  the  London  and  West 
minster  Bank,  the  Union  Bank  of  London,  the  bank 
ing  house  of  Messrs.  Glyn  &  Co.,  or  the  British  Linen 
Company  Bank.  Correspondents  elsewhere  are  of 
equal  standing,  so  that  wherever  it  is  payable,  the 
bill  drawn  by  a  Canadian  bank  is  of  the  highest  class. 
The  New  York  agencies  do  not  receive  deposits  or 
discount  notes.  They  have  no  considerable  liabilities 
and  practically  the  whole  amount  of  their  funds  is 
always  available. 

What  use  is  occasionally  made  of  this  reserve  may 
be  illustrated  by  the  action  of  the  banks  during  the 
Canadian  stringency  of  early  1875,  and  still  more 
graphically  by  the  net  decrease  of  the  "foreign  bal 
ances"  (which  really  mean,  for  the  most  part,  Amer 
ican  balances),  by  over  eight  million  dollars  between 
the  last  of  January  and  the  last  of  August,  1893. 
Yet  the  advantage  of  their  establishments  in  the 
United  States  is  not  by  any  means  confined  to  the 
Canadian  banks.  In  New  York,  the  sellers  of  cotton 
bills,  with  whom  their  transactions  are  enormous, 
doubtless  feel  that  the  benefit  is  mutual.  So  too,  the 
great  grain  merchants  in  the  export  trade.  Many  a 
dealer  in  stocks  has  had  occasion  to  thank  these  for 
eign  corporations  at  times  when,  just  as  many  banks 
were  calling  in  their  loans,  and  it  seemed  that  bor 
rowing  from  others  would  soon  be  ruinous  or  impos 
sible,  the  agents  of  Canadian  banks  have  come  into 
the  Stock  Exchange  with  offers  to  advance  freely  as 
long  as  the  security  was  good.  -Farther  west,  large 


The  Business  of  Canadian  Banks  457 

sums  of  surplus  Canadian  money  are  employed  in  the 
grain  markets  of  Minneapolis,  Duluth  and  Chicago. 
On  the  Pacific  slope,  where  the  Bank  of  British  Col 
umbia  is  established,  it  ranks  as  one  of  the  most  im 
portant  corporations  of  the  kind.  In  San  Francisco 
the  other  British  bank  has  an  office  in  which  is  carried 
on  a  heavy  business  in  exchange  and  such  other 
transactions  as  circumstances  permit. 

New  York,  of  course,  is  not  the  only  scene  of  the 
transactions  of  the  Canadian  banks  in  sterling  ex 
change.    Nearly  every  one  of  the  chartered  companies 
has  its  London  correspondent,  and  deals  in  sterling 
bills.     The  rate  of  interest  in    comparatively  quiet 
periods  is  so  low  in  London  that  it  is  more  profitable 
for  a  bank   to  hypothecate  a  part   of   its  securities, 
bearing  interest  say  at  4  per  cent.,  than  to  keep  a 
cash  balance  loaned  out  at  call  there.     Consequently 
the  Canadian  banks  are  usually  somewhat  in  debt  to 
their    London    correspondents.     By    reason    of    the 
branch  system  and  the  presence  of  a  number  of  banks 
well  equipped  for  such  transactions,  there  is  plenty 
of    competition   in   the   Canadian  exchange  market, 
and  a  buyer  or  seller  is  always  near  at  hand.     The 
government  takes  advantage  of  this  when  negotiating 
London  bills  by  inviting  tenders  from  all  the  banks. 
What    particular   gain    there    may  be  in   making 
foreign  payments  or  collections  through  the  agencies 
employed    in    the    manifold   exchanges  of   domestic 
trade,  I  do  not   purpose  to   examine.     The  conven 
ience,  doubtless,  is  greater.     The  banks  of  New  York 
City  and  the  national  banks  generally — with  marked 
exceptions  in  Chicago  and  California — have  left  the 
business  in  foreign  exchange  and  a  number  of  other 
banking  operations,  to  houses  specializing  in  those 


458  The  Canadian  Banking  System,  1817-1890 

lines,  chiefly  private  or  foreign  bankers.  National 
bankers  lack  both  the  facilities  and  training  for  such 
business.  Particularly  for  dealing  in  exchange,  the 
operator  needs  habits  of  close  observation,  acute 
reasoning  faculties,  prudence,  caution,  decision,  a 
varied  experience  and  thorough  technical  training. 
The  Canadian  chartered  banks  can  successfully  under 
take  the  business,  for  it  is  exactly  these  qualities  in 
its  servants  that  the  Canadian  banking  system  is 
admirably  calculated  to  develop. 

Further  details  belong  to  the  technique  of  banking 
practice  or  to  the  minutiae  of  banking  law.  How  far 
the  principles  on  which  the  Canadian  banks  are 
organized,  by  which  they  are  regulated  and  accord 
ing  to  which  they  are  managed,  are  of  general  appli 
cation,  is  a  question  to  be  decided  as  the  banking 
system  conforms  to  the  general  economic  tests.  How 
the  Canadian  banks  economize  capital;  how  they 
utilize  and  distribute  it;  what  is  the  security,  con 
vertibility  and  elasticity  of  the  circulating  medium 
they  supply;  how  thoroughly  are  their  creditors  pro 
tected  against  loss;  how  low  and  how  nearly  equal 
are  the  rates  of  interest  in  different  parts  of  the 
country;  how  cheaply  are  other  banking  services  sold; 
how  easy  of  access  are  banking  facilities;  what  sup 
port  have  worthy  customers  in  critical  times;  and  how 
far  does  the  system  promote  the  stability  of  commer 
cial  confidence:  these  are  questions  to  which,  per 
haps,  this  chapter  forms  an  answer.  According  to 
the  true  response,  the  merits  of  the  Canadian  Bank 
ing  System  must  be  judged.  If  the  present  answer 
be  sufficient,  the  reader  may  draw  his  own  con 
clusions. 


APPENDIX  I 


TABLE    SHOWING    THE    GRAND    TOTALS    OF 

THE    LIABILITIES    AND    ASSETS    OF 

THE  CHARTERED  BANKS 

OF  the  Dominion  of  Canada  as  reported  to  the  government  on  the 
30th  June  1867;  the  31st  December,  1868-1893;  and  the  30th 
June,  1894. 


orted  to  the  C 

ES 

No.  of 

Banks 

Total 

reporting 
to  the 

nc 

Liabilities 

rov'ment2 

38 

1867    .. 
1868  

{ 

$44,548,376 
51,008,675 

1869  .  .  - 

61,482,490 

••  . 

1870.... 

72,494,049 

es 

• 

ded 

1 

ic 

P* 

ng 

4 

1871... 
1872  

240 
561 

86,484,726 
93,350,100 

[•rovincial 

pvemnient 
Deposits 

yable  after 

notice  or 

on  a 

Qxed  day 

39 
39 
39 
39 
36 

1873.     .  . 
1874.     .. 
1875.     .  . 
1876.     . 
1877. 
1878.     .  . 
1879..   . 

$2,321,729 
3,254,762 
2,932,747 
3,236,912 
505,954 
29(5,348 
116,374 

299 
240 
239 
341 
154 
409 
645 

104,526,166 
126,090,487 
97,363,173 
101,192  SB 
96,97(5,027 
97,332,543 
105,802.821 

36 
36 
36 
36 
38 
41 
41 
38 
38 
38 
38 

1880.   ... 

1882!   '.'.'. 
1883.   ... 
188*.   ... 

1885.   ... 
1886.   ... 
1887.   .. 
1888.   .., 
J889.   ... 
1890.   ... 

596,107 
711,157    i 
1,418,307     ! 
2,434,596     ' 
1,893,511     ! 
1,475,129 
508,929 
1,169,213 
1,907,809 
2,004,10  1 
1,636,915 

534 

278 
265 
90(5 
977 
207 
628 
(579 
101 
161 
524 

121,471,722 
140,34(5,311 
149,749,536 
145,812,744 
135,374,!H7 
147,440,252 
150,518,455 
153,218,603 
176,360.938 
171,684,384 
178,826,551 

c  to 

Dei 

ll 

th( 

nts 

P 

on 

38 
39 

1891  
1892  

2 
A 

1 

,391 
,426 

199,453,832 

221,5(57,771 

39 

39 

1893....  W 
30th  Jui}6 

6 

,796 
,285 

218,t;<i2,%5 
221,292,707 

1  The  figures  for  i/ci  Gazette. 

2  Prior  to  1875.  tfte  number  of  ba 

ose  reporting  to  the 

lominion  governmel 

APPENDIX  II 


SUNDRY    ITEMS    OF    THE    STATEMENTS   OF 
LIABILITIES  AND  ASSETS 

FURNISHED  to  the  Department  of  Finance  for  the  last  juridical  days 
of  the  month  ending  the  31st  December,  1890-1893,  and  the 
30th  June,  1894,  by  Chartered  Banks  of  the  Dominion  of 
Canada  having  Paid-up  Capital  Stocks  of  $500,000  or  over. 
Compiled  from  the  Canada  Gazette. 


464          The  Canadian  Banking  System,  1817-1890 


(000  omitted) 

Year 
31st  Dec. 

Capital 
paid-up 

Rest 

Circula 
tion 

Deposits 
by  the 
public 
payable 
on 
demand 

Bank  of  Montreal,      1890 

$12000 

$6000 

$5332 

$  9994 

Montreal           1891 

12000 

6000 

5163 

13249 

1892 

12000 

6000 

5327 

13597 

1893 

12000 

6000 

5056 

13428 

30th  June,  1894 

12000 

6000 

4542 

13740 

Canadian  Bank  of  Com-   1890 

6000 

800 

2942 

4115 

merce,  Toronto       1891 

6000 

900 

2992 

4942 

1892 

6000 

1000 

3255 

5775 

1893 

6000 

1100 

3061 

4862 

30th  June,  1894 

6000 

1200 

2545 

5105 

Merchants'  Bank  of  Can-  1890 

5799 

2335 

3107 

3143 

ada,  Montreal        1891 

5799 

2510 

3461 

3797 

1892 

6000 

2725 

3474 

3831 

1893 

6000 

2900 

2927 

3261 

30th  June,  1894 

6000 

3000 

2393 

3826 

Bank  of  British  North  1890 

4866 

1241 

1280 

2087 

America,  London,  Eng.,  1891 

4866 

1289 

1193 

2201 

and  Montreal1       1892 

4866 

1289 

1173 

2327 

1893 

4866 

1338 

1084 

2239 

30th  June,  1894 

4866 

1338  1015 

2070 

Bank  of  British  Colum-  1890 

2920 

973 

1106 

2004 

bia,  Victoria  and  Lon-  1891 

2920 

1070 

1065 

2389 

don,  Eng.           1892 

2920 

1266 

848   2707 

1893 

2920 

1314 

886 

2481 

30th  June,  1894 

2920 

1338 

800 

2772 

Quebec  Bank,         1890 

2500 

500 

568   3875 

Quebec,            1891 

2500 

500 

648 

4331 

1892 

2500 

550 

704 

4481 

1893 

2500 

550 

826 

4316 

30th  June,  1894 

2500 

550 

642 

4622 

Bank  of  Toronto,       1890 

2000 

1500 

1591 

3909 

Toronto,            1891 

2000 

1600  1699 

5191 

1892 

2000 

1700  !  1771 

5425 

1893 

2000  1800 

1591 

5132 

30th  June,  1894 

2000 

1800 

1254 

5434 

Molsons'  Bank,        1890 

2000 

1100  1913 

3637 

Montreal,           1891 

2000 

1100  !  1828 

4345 

1892 

2000 

1150 

1868 

5429 

1893 

2000 

1200 

1761 

4806 

30th  June,  1894 

2000 

1200 

1535 

5010 

Imperial  Bank  of  Canada,  1890 

1500 

700 

1416 

2494 

Toronto            1891 

1909 

954 

1516 

2981 

1892 

1947 

1023 

1592 

3197 

1893 

1953 

1101 

1503 

2608 

30th  June.  1894 

1954 

1152   1220 

2459 

Appendix  II 


465 


Total 
Liabilities 

Specie 

Dominion 

Notes 

Balances  due 
from  agencies  of 
the  bank,  or  from 
other  banks  or 
agencies  in 
foreign  countries 

Current 
Loans 

Total 

Assets 

Rate 
per  cent, 
of  last 
dividend 

$28700 

$2221 

$2399 

$  4553 

$28406 

$47978 

10 

32439 

1695 

2142 

9871 

28687 

51405 

10 

35427 

2073 

3157 

11395 

29484 

54432 

10 

36007 

2760 

2207 

10854 

28831 

55212 

10 

36269 

2704 

2910 

7356 

33060 

55560 

10 

16074 

438 

466 

759 

16796 

23061 

7 

18841 

392 

587 

2227 

16298 

25926 

7 

21748 

396 

714 

3404 

17774 

28924 

7 

20695 

399 

780 

1716 

19664 

28016 

7 

20743 

361 

693 

1683 

19021 

28001 

7 

13255 

452 

468 

512 

16283 

21664 

7 

15163 

320 

566 

1103 

16653 

23765 

7 

15586 

999 

673 

1335 

16393 

24507 

7 

14139 

382 

859 

1053 

16703 

23258 

7 

14010 

386 

1082 

726 

16725 

23102 

71 

9788 

383 

859 

677 

9306 

14285 

7i 

10382 

320 

668 

623 

9061 

12179 

7i 

10738 

348 

712 

692 

9321 

13122 

Ik 

10103 

362 

701 

693 

8626 

11964 

7£ 

9483 

346 

628 

881 

8545 

12024 

7| 

4530 

186 

231 

133 

4265 

5125 

6 

5486 

212 

218 

76 

5340 

6188 

6 

5759 

429 

794 

69 

5039 

6689 

6 

5742 

512 

797 

5384 

7001 

6 

6075 

408 

675 

"62 

5838 

7287 

6 

5913 

73 

432 

77 

5998 

9030 

7 

6424 

80 

356 

79 

5356 

9528 

7 

7311 

79 

287 

67 

6418 

10411 

7 

7116 

90 

557 

56 

6200 

10248 

7 

7767 

96 

520 

87 

^7027 

10950 

7 

8409 

308 

431 

185 

9264 

12188 

10 

9956 

338 

695 

594 

9861 

13806 

10 

10546 

356 

587 

546 

11278 

14550 

10 

10157 

542 

1112 

399 

10412 

14238 

10 

9959 

547 

1154 

420 

9934 

13989 

10 

8858 

257 

357 

72 

9518 

12186 

8 

9971 

201 

551 

197 

10206 

13349 

8 

11470 

206 

503 

197 

11137 

14984 

8 

10326 

121 

691 

97 

10449 

13890 

8 

10732 

140 

613 

151 

10777 

14335 

8 

7704 

300 

699 

270 

6152 

10055 

8 

9077 

293 

648 

461 

7128 

12156 

8 

10033 

288 

688 

469 

7805 

13232 

8 

10218 

358 

1174 

285 

7110 

13435 

8 

9845 

384 

1028 

331 

7190 

13097 

8 

466  The  Canadian  Banking  System,  1817-1890 


(000  omitted) 

Deposits 

Deposits  by 

Year 
31st  Dec. 

Capital 
Paid-up 

Rest 

Circula 
tion 

by  the 
public 
payable 

the  public 
payable 
after  notice 

on 

or  on  a 

demand 

fixed  day 

Dominion  Bank,                   1890 

$1500 

i>1300 

$1292 

$2739 

$5335 

Toronto                                 1891 

1500 

1350 

1226 

2828 

5796 

1892 

1500 

1400 

1132 

3525 

6140 

1893 

1500 

1450 

1036 

2776 

6376 

30th  June,  1894 

1500 

1500 

943 

296  L 

7008 

Bank  of  Nova  Scotia,           1890 

1114 

700 

1307 

1265 

1061 

Halifax                                 1891 

1500 

1000 

1187 

1013 

4375 

1892 

1500 

1050 

1128 

1256 

4306 

1893 

1500 

1200 

1163 

1180 

4553 

30th  June,  1894 

1500 

1200 

1148 

1261 

4543 

Ontario  Bank,                        1890 

1500 

250 

964 

1532 

2785    ' 

Toronto                                1891 

1500 

280 

1032 

1624 

3014 

1892 

1500 

315 

1056 

1852 

3475 

1893 

1500 

345 

901 

1382 

3462 

30th  June,  1894 

1500 

345 

900 

1379 

3574 

Eastern  Townships  Bank    1890 

1487 

550 

782 

589 

1884 

Sherbrooke                         1891 

1487 

600 

774 

568 

1989 

1892 

1499 

625 

780 

552 

2236 

1893 

1499 

650 

761 

544 

2396 

30th  June,  1894 

1499 

680 

814 

523 

2369 

Bank  of  Ottawa,                    1890 

1000 

425 

870 

709 

2094 

Ottawa                                 1891 

1204 

587 

1007 

819 

2115 

1892 

1342 

710 

1012 

1282 

2458 

1893 

1487 

847 

1030 

1032 

3067 

30th  June,  1894 

1489 

848 

825 

810 

3340 

Bank  of  Hamilton,               1890 

1145 

515 

1103 

1153 

2458 

Hamilton                            1891 

1239 

614 

1175 

1383 

3074 

1892 

1250 

650 

1161 

1487 

3525 

1893 

1250 

650 

1145 

1250 

3623 

30th  June,  1894 

1250 

675 

886 

1286 

3590 

Banque  du  Peuple,               1890 

1200 

400 

756 

1423 

2160 

Montreal                             1891 

1200 

425 

748 

1246 

2400 

1892 

1200 

480 

810 

1542 

3372 

1893 

1200 

550 

825 

1499 

3928 

30th  June,  1894 

1200 

600 

787 

2168 

4391 

Banque  Nationale,                1890 

1200 

100 

632 

683 

1147 

Quebec                                1891 

1200 

710 

705 

1139 

1892 

1200 

937 

744 

1474 

1893 

1200 

30 

1054  ! 

842 

1735 

30th  June,  1894 

1200 

30 

852 

787 

1717 

Union  Bank  of  Canada,       1890 

1200 

200 

1036 

854 

2195 

Quebec                                1891 

1200 

225 

1117  i 

1006 

2310 

1892 

1200 

225 

1130 

1048 

2758 

1893 

1200 

250 

1160 

735 

2952 

30th  June,  1894 

1200 

280 

939 

939 

2971 

Appendix  II 


467 


Total 
Liabilities 

Specie 

Balances  due 
from  agencies  of 
Dominion  the  bank,  or  from 
Notes     other  banks  or 
agencies  in 
foreign  countries 

Current 
Loans 

Total 

Assets 

Rate 
per  cent, 
of  last 
dividend 

$  9394 

$187 

$344     $  811 

$7415 

$12407 

10 

9985 

197 

349      1390 

6766 

13055 

10 

11054 

223 

611 

1399 

7299 

14178 

10 

10243 

227 

442 

1106 

6996 

13423 

10 

10930 

240 

653 

1033 

7202 

14076 

10 

7089 

292 

377 

108 

5554 

8911 

7 

7300 

261 

451 

309 

6445 

9809 

8 

7505 

378 

492 

240 

6468 

10058 

8 

7739 

299 

565 

309 

6191 

10441 

8 

8295 

179 

443 

941 

6400 

11038 

8 

5506 

176 

347 

88 

5152 

7384 

7 

5779 

160 

360 

117 

5292 

7715 

7 

6685 

170 

372 

175 

6045 

8636 

7 

6180 

180 

302 

77 

5869 

8134 

7 

6223 

181 

319 

143 

6024 

8180 

7 

3305 

117 

97 

164 

4550 

5493 

7 

3366 

123 

99 

194 

4110 

5569 

7 

3625 

107 

92 

214 

4458 

5879 

7 

3766 

117 

98 

411 

4528 

6050 

7 

3810 

91 

104 

163 

4774 

6060 

7 

4010 

116 

94 

42 

4683 

5534 

8 

4228 

117 

122 

269 

5011 

6125 

8 

5055 

114 

123 

217 

5895 

7235 

8 

5368 

120 

169 

312 

6164 

7813 

8 

5287 

130 

186 

289 

5902 

7798 

8 

4930 

183 

186 

23 

4996 

6719 

8 

5721 

159 

220 

47 

5779 

7706 

8 

6375 

170 

188 

131 

5113 

8401 

8 

6551 

173 

228 

35 

5881 

8558 

8 

6408     182 

301 

37 

5893 

8395 

8 

4651      44 

146 

4 

5201 

6371 

6 

4617 

47 

184 

45 

4993 

6305 

6 

6029 

97 

172 

33 

5853 

7786 

6 

6574 

50 

191 

3 

6706 

8391 

6 

7530 

48 

438 

75 

6947 

9308 

6 

2562 

87 

112 

96 

2785 

3997 

6 

2634 

67 

59 

92 

2639 

3966 

6 

3246 

74 

105 

38 

2918 

4593 

6 

3721 

61 

191 

87      3772 

5116 

6 

3530 

61 

109 

75 

3901 

4838 

6 

4851 

31 

174 

30 

5435 

6419 

6 

5086 

28 

194 

66 

5698 

6655 

6 

5811 

38 

226 

8 

6023 

7397 

6 

5645 

24 

174 

25 

5742 

7177 

6 

5731 

30 

229 

63 

6028 

7266 

6 

468  The  Canadian  Banking  System,  1817-1890 


(000  omitted) 

Year 
31st  Dec. 

Capital 
paid-up 

Rest 

Circula 
tion 

Deposits 
by  the 
public 
payable 
on 
demand 

Merchants'  Bank  of  Hali-  1890  !$1100 

$375 

$996 

$  945 

fax,  Halifax                       1891  i  1100 

450 

949  |       993 

1892     1100 

510 

1020 

1391 

1893      1100 

600 

1013 

1222 

30th  June,  1894     1100 

600 

932 

1187 

Standard  Bank,                     1890 

1000 

460 

815 

1465 

Toronto                               1891 

1000 

500 

926 

1782 

1892 

1000 

525 

911 

1802 

1893 

1000 

550 

835 

1640 

30th  June,  1894 

1000 

600 

580 

1325 

Banque  d'Hochelaga,          1890 
Montreal                            1891 

710 
710 

160 
160 

581 
589 

447 
620 

1892 

710 

200 

566 

598 

1893 

710 

230 

641 

680 

30th  June,  1894 

710 

270 

634 

641 

People's  Bank  of  Halifax,  1890 

600 

70 

433 

215 

Halifax                               1891 

680 

90 

490 

291 

1892 

700 

115 

428 

227 

1893 

700 

130 

441 

360 

30th  June,  1894 

700 

160 

438 

440 

Traders'  Bank  of  Canada,  1890 

592 

20 

576 

724 

.  Toronto                               1891 

604 

35 

591 

995 

1892 

607 

55 

590 

856 

1893 

607 

75 

600 

768 

30th  June,  1894 

607 

85 

565 

726 

Bank  of  New  Brunswick,  1890 

500 

440 

455 

674 

St.  John                             1891 

500 

500 

435 

508 

1892 

500 

525 

444 

656 

1893 

500 

525 

453 

591 

30th  June,  1894 

500 

525 

463 

624 

Union  Bank  of  Halifax,     1890 

500 

70 

335 

227 

Halifax                               1891 

500 

90 

278 

-     352 

1892 

500 

110 

274 

353 

1893 

500 

120 

302 

440 

30th  June,f  1894 

500 

140 

331 

467 

Halifax  Banking  Com'y,  1890 
Halifax,                              1891 

500 

500 

170 
210 

489 
463 

411 

384 

1892 

500 

210 

450 

444 

1893 

500 

210 

455 

409 

30th  June,  1894 

500 

250 

485 

423 

Banque  Jacques  Cartier,     1890 
Montreal                            1891 

500 
500 

150 
150 

413 
419 

1013 
575 

1892 

500 

175 

403 

598 

1893 

500 

215 

402 

747 

30th  June,  1894 

500 

225 

427 

636 

Appendix  II 


469 


Balances  due 

Total 
Liabilities 

Specie 

Dominion 

Notes 

from  agencies  of 
the  bank,  or  from 
other  banks  or 

Current    Total 
Loans     Assets 

Rate 
per  cent. 
of  last 

agencies  in 

dividend 

foreign  countries 

$4374 
4714 
5991 
5941 
6160 

$143 
145 
138 
187 
143 

$398 
455 
544 
465 
402 

$168 
87 
170 
110 

108 

$4553 
4261 
4794 
5130 
5497 

$5849 
6264 
7601 
7641 
7936 

6 
6 

6 

7 
7 

4488 
5440 
5939 
6236 
5928 

141 
140 
138 
145 
149 

210 
247 
274 
295 
298 

15 
86 
127 
31 
25 

3689 
3550 
3604 
4398 
4533 

6052 
7048 
7576 
7807 
7550 

7 
8 
8 
8 
8 

2097 
2659 

65     151 
68     113 

51 
71 

2095 
2261 

2975 
3591 

6 
6 

3222 

58     130       50 

3186 

4214 

6 

3974 

54     233       61 

3353 

5032 

6 

3845 

66     117 

148 

3365 

4856 

6 

1210 

35     35 

9 

1534 

1931 

6 

1371 

30  I    45 

1 

1932 

2216 

6 

1611 

25 

111 

79 

2044 

2488 

6 

1655 

26 

113 

34 

2207 

2572 

6 

1733 

24 

121 

77 

2206 

2658 

6 

2530 
3470 
3960 
4188 
4271 

72 

68 
79 
101 
114 

140 
147 
132 
221 
194 

16 
5 
69 
24 
23 

2371 

2905 
2920 
2979 
3140 

3166 
.  4141 
4661 
4901 
4982 

6 
6 
6 
6 
6 

2038 

108 

200 

67 

1993 

3070 

12 

2087 
2317 
2291 
2347 

99 

182 
156 
167 

172 

162 
168 
238 

70 
75 
69 
299 

2271 
2347 
2274 
1915 

3122 
3379 
3372 
3439 

12 
12 
12 
12 

1390 

24 

40 

8 

1356 

1991 

5i 

1412 

25 

70 

1 

1502    2041 

6 

1277 

24     33 

12 

1325 

1925 

6 

1513 

25     84 

9 

1670 

2179 

6 

1746. 

27 

98 

19 

1769 

2420 

6 

2380 
2552 

34 
22 

68 
86 

28 
32 

2722 
2966 

3'075 
3262 

6 
6 

2519 

30     236 

120 

2701 

3253 

6 

2501 

49     189 

54 

2712 

3298 

6 

2565 

49     113 

93 

2801 

3406 

6 

2145 

42     30 

13 

1866 

2841 

7 

2468 

29     118 

31 

2050 

3174 

7 

2945 
3221 

29     98 
30     65 

34 
37 

2514 
2952 

3685 
4023 

7 
7 

3300 

29     155 

63 

3081 

4069 

7 

470 


The  Canadian  Banking  System,  1817-1890 


APPENDIX     III 

TABLE  showing  grand  total  of  Notes  in  Circulation  at  the  end  of 
each  calendar  month  from  January,  1879,  to  June,  1894,  from 
"  Report  of  the  Chartered  Banks  of  the  Dominion  of  Canada," 
published  as  supplement  to  the  Canada  Gazette: 


1879 

1880 

1881 

1882 

1883 

Jan  .  .  . 

$ 

19985958 

$ 

'?0393301 

$ 
96010035 

$ 

31946809 

$ 

33729447 

Feb  

19014558 

20495^19 

26169190 

32594149 

34044909 

Mar  
Apr  
May.... 
June  
July.... 
Aug 

19193485 
18162105 
17479608 
18090814 
16956630 
17953597 

20793775 
19864343 
19612921 
20186176 
20186470 
21397953 

26439316 
26044888 
25575729 
26102368 
26047733 
97431  9]  g 

32947269 
32712335 
31861044 
32229937 
31729233 
31458191 

34517813 
33082658 
31301075 
32212240 
32093938 
32118943 

Sept  
Oct  

20004989 
23201007 

24369798 
27981567 

31753589 
35034308 

33953387 
37940516 

33145845 
35563243 

Nov  .... 
Dec  

21827712 
22252761 

27745597 
27328358 

33145292 
32358845 

37180399 
36501694 

34007350 
33589454 

]884 

1885 

1886 

1887 

1888 

$ 

$ 

$ 

$ 

$ 

Jan  

30031076 

29689046 

29845735 

32110620 

31952132 

Feb  

29576177 

30166082 

29691347 

32304887 

31363400 

Mar  .... 

30197882 

29791262 

29959916 

31521420 

31985285 

Apr  
May.... 

29239635 
28449049 

28491692 
29124205 

29281603 
28900765 

30467891 
30086803 

30742577 
29278074 

June  

29654511 

29692803 

29200627 

30438152 

30444643 

July.... 

28063301 

29607902 

28882843 

30845304 

30241455 

Aug  .... 

29137301 

30108359 

29515389 

31666467 

30448815 

Sept.  .  .  . 

31456024 

31334621 

31927050 

33765609 

32913526 

Oct  

33988079 

34576246 

35322015 

37012342 

36246775 

Nov.... 

33653945 

33702934 

35260345 

35163321 

36060933 

Dec  

31935933 

,  32363992 

34578347 

34354595 

34785486 

1889 

1890 

1891 

1892 

1893 

1894 

$ 

$ 

$ 

$ 

$ 

$ 

Jan 

31592372 

30870961 

31662099 

32705400 

32831747 

30571375 

Feb  

31866151 

30627074 

31925749 

32711015 

32978840 

30603267 

Mar  .... 

32471522 

31704281 

33020661 

32483965 

33430883 

30702607 

Apr  

31299842 

30671938 

30904096 

31496369 

32633073 

29996472 

May.... 

30012900 

30831914 

30917214 

31383218 

31927342 

28467718 

June  

31209972 

32059177 

31379886 

32614699 

33483413 

30254159 

July.... 

30343413 

31167628 

30579968 

32488718 

33573468 

Aug  

31090284 

32718363 

32012196 

32646187 

33308967 

Sept.  .  . 

32888429 

35522319 

34083051 

34927615 

35128926 

Oct  

35233310 

36480649 

37182768 

38688429 

36906941 

Nov  .... 

34899830 

36344546 

37430690 

37124505 

35120561 

Dec  

33577700 

35006274 

35634129 

36194023 

34418936 

APPENDIX  IV 


BIBLIOGRAPHY 


Acts  of  the  General  Assembly  of  H.  M.  Province  of  New  Brunswick  from 
26  George  III  to  6  William  IV.  Fredericton,  1838. 

.     The  same.     (Separate  volume  for  each  session.) 

Fredericton,  1837-1867. 

Acts  of  the  General  Assembly  of  the  Province  of  Nova  Scotia.  Hali 
fax,  1836-1867;  (another  title  is  Provincial  Statutes  of  Nova  Scotia.) 

Acts  of  the  Parliament  of  the  Dominion  of  Canada,  1867-1894,  27  ses 
sions.  Ottawa,  1867-1894.  (The  Acts  of  each  session  are 
divided  into  two  volumes,  "Public  General  Acts,"  and  "Local 
and  Private  Acts.") 

BAGEHOT,  WALTER.     Lombard  street.     New  York,  1892. 

Bankers'  Magazine.     Vols.  i-xvii.     London,  1843-1856. 

BOWLES,  WILLIAM  C.  General  Index  to  the  Journals  of  the  House  of 
Commons  of  the  Dominion  of  Canada  and  to  the  Sessional  Papers 
of  Parliament,  1867-1876.  Ottawa,  1880. 

.     The  same,  1877-1890.     Ottawa,  1891. 

BULLION,  THOMAS  (GEORSE  RAE).  The  Internal  Management  of  a 
Country  Bank,  with  notes  and  observations  by  a  Canadian  Bank 
Manager  (George  Hague).  Toronto,  1876. 

Canada  Gazette,  The  (Dominion).     Vols.  i-xxvii,  Ottawa,  1867-1894. 

Canada  Gazette,  The  (Province).     Vols.  i-xxvi,  1842-1867. 

Canada,  Public  Accounts  for  the  fiscal  year  ended  oOth  June,  1893, 
printed  by  order  of  Parliament.  Ottawa,  1893. 

Canadian  Journal  of  Commerce,  Finance  and  Insurance  Review,  The. 
Vols.  i-xxxiv,  Montreal,  1876-1892. 

CHITTY,  JOSEPH.  A  Treatise  on  the  Law  of  the  Prerogatives  of  the 
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472  The  Canadian  Banking  System,  1817-1890 

COURCELLE-SENEUIL,  J.  G.  Traitc  des  Operations  de  Banque.  Cinqui- 
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DANIEL,  JOHN  W.  A  Treatise  on  the  Law  of  Negotiable  Instruments. 
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•     Laws  of    the    United  States  relating   to    Currency, 

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lecture  reprinted  from  the  Shareholder).     Montreal,  1884. 


Appendix  IV  473 

HAMILTON,  ALEXANDER.     Report  on  a  National  Bank,  13th  December, 

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treal,  1893;  no.  3-4,  vol.  ii,  no.  1,  Toronto,  1894, 
Journal  of  the  House  of  Assembly  of  the  Province  of  Lower  Canada, 

1792-1836. 
Journal  of  the  House  of  Assembly  of  the  Province  of  Nova  Scotia,  1832- 

1866. 
Journal  of  the  House  of  Assembly  of  the  Province  of  New  Brunswick. 

Fredericton,  1820-1867. 
Journal  of  the  House  of  Assembly  of  Upper  Canada.     Kingston,  1821. 

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Journal  of  the  House  of  Assembly  of  Upper  Canada,  1816-1824,  type 
written  copies  in  the  Legislative  Library  at  Toronto,  and  MS.  in 

Library  of  Parliament,  Ottawa. 
Journals  of  the  House  of  Commons  of  the  Dominion  of  Canada.    Vols. 

i-xxvii,  Ottawa,  1868-1893. 
Journals  of  the  Legislative  Assembly  of  the  Province  of   Canada.     26 

volumes,  1841-1866. 
Journal  of  the  Legislative  Council  of  the  Province  of  Upper  Canada. 

Toronto,  1837. 
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1893. 
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Washington,  1876. 
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MACLEOD,  H.  D.     The  Theory  and  Practice  of  Banking.     Fourth  edi 
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and  Lower  Canada.     London,  1838. 
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i-xxvii,  Toronto,  1867-1894. 


474          The  Canadian  Banking  System,  1817-1890 

MORGAN,  HENRY  J.  The  Dominion  Annual  Register  and  Review. 
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PALGRAVE,  R.  H.  INGLIS.  Analysis  of  the  Minutes  of  Evidence  taken 
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Provincial  Statutes  of  Canada,  The.  Kingston,  1841,  1842,  1843; 
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Statement  of  the  Affairs  of  the  late  Bank  of  Upper  Canada  at  Kingston, 
taken  from  Authentic  Documents.  Kingston,  1840. 


Appendix  IV  475 

Statutes  at  Large  passed  in  the  several  General  Assemblies  of  H.  M. 
Province  of  Nova  Scotia,  The.  Vol.  ii,  1805-1816,  Halifax,  1816; 
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1829,  1830;  lst-4th  session  llth  Parliament,  York,  1831,  1832, 
1833,  Toronto,  1834;  lst-2d  session  12th  Parliament,  Toronto, 
1835-1836;  Ist-oth  session  13th  Parliament,  Toronto,  1837,  1837, 
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VAN  BUREN,  MARTIN.  Message  of  His  Excellency,  the  Governor,  on 
the  subject  of  Banks,  with  the  plan  suggested  to  place  them  under 
proper  regulations,  secure  the  public  from  loss  by  failure,  and  fur 
nish  a  sound,  well  regulated  currency,  made  to  the  Assembly,  Janu 
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476  The  Canadian  Banking  System,  1817-1890 

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